Question : 55) Maremount Tire Company needs to overhaul its auto lift : 1217115

 

55) Maremount Tire Company needs to overhaul its auto lift system or buy a new one. The facts have been gathered, and they are as follows:

 

 

Current Machine

New Machine

Purchase Price, New

$112,500

$148,000

Current book value

33,500

 

Overhaul needed now

27,500

 

Annual cash operating costs

63,000

48,000

Current salvage value

40,000

 

Salvage value in five years

8,000

35,000

 

Required:

Which alternative is the most desirable with a current required rate of return of 15%? Show computations, and assume no taxes.

 

 

56) ABC Boat Company is interested in replacing a molding machine with a new improved model. The old machine has a salvage value of $10,000 now and a predicted salvage value of $4,000 in six years, if rebuilt. If the old machine is kept, it must be rebuilt in one year at a predicted cost of $20,000.

 

The new machine costs $80,000 and has a predicted salvage value of $12,000 at the end of six years. If purchased, the new machine will allow cash savings of $20,000 for each of the first three years, and $10,000 for each year of its remaining six-year life.

 

Required:

What is the net present value of purchasing the new machine if the company has a required rate of return of 14%?

57) Retail Outlet is looking for a new location near a shopping mall. It is considering purchasing a building rather than leasing, as it has done in the past. Three retail buildings near a new mall are available but each has its own advantages and disadvantages. The owner of the company has completed an analysis of each location that includes considerations for the time value of money. The information is as follows:

 

 

Location A

Location B

Location C

Internal rate of return

13%

17%

20%

Net present value

$25,000

$40,000

$20,000

 

The owner does not understand how the location with the highest percentage return has the lowest net present value.

 

Required:

Explain to the owner what is (are) the probable cause(s) of the comparable differences.

 

Objective 21.3

 

1) The method that measures the time it will take to recoup, in the form of future cash inflows, the total dollars invested in a project is called:

A) the accrued accounting rate-of-return method

B) payback method

C) internal rate-of-return method

D) the book-value method

2) The net initial investment for a piece of construction equipment is $2,000,000. Annual cash inflows are expected to increase by $400,000 per year. The equipment has an 8-year useful life. What is the payback period?

A) 8 years

B) 7 years

C) 6 years

D) 5 years

 

3) The payback method of capital budgeting approach to the investment decision highlights:

A) cash flow over the life of the investment

B) the liquidity of the investment

C) the tax savings of the depreciation amounts

D) having as lengthy payback time as possible

 

4) Upper Darby Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $72,096. The annual cost savings if the new machine is acquired will be $20,000. The machine will have a 5-year life, at which time the terminal disposal value is expected to be zero. Upper Darby Park is assuming no tax consequences. Upper Darby Park has a 10% required rate of return. What is the payback period on this investment?

A) 3 years

B) 3.6 years

C) 4.2 years

D) 5 years