A small manufacturing company is considering purchasing a maintenance contract for air conditioning systems . Since all of its systems are newthe company plans to begin the contract in year four and continue through year ten . The cost of the contract is $5000 per year and the npany^ prime s minimum attractive rate of return is 15% per year. The present worth of the contract is nearest to

A small manufacturing company is considering purchasing a maintenance contract for air conditioning systems . Since all of its systems are newthe company plans to begin the contract in year four and continue through year ten . The cost of the contract is $5000 per year and the npany^ prime s minimum attractive rate of return is 15% per year. The present worth of the contract is nearest to

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 17EB: Caduceus Company is considering the purchase of a new piece of factory equipment that will cost...

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Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
You have just been offered a contract worth $1.02 million per year for 6 years. However, to take the contract, you will need to purchase some new equipment. Your discount rate for this project is 11.7% You are still negotiating the purchase price of the equipment. What is the most you can pay for the equipment and still have a positive NPV? CEED The most you can pay for the equipment and achieve the 11.7% annual return is $ million (Round to two decimal places)
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A temporary warehouse can be built for $10 million and its salvage value when decommissioned is zero. The annual revenue from the sale of storage space minus maintenance and operating costs is estimated at $3 million. If the attractive minimum rate of return is 13% per year and the warehouse is used for 8 years, does the investment matter? What is the minimum useful life for the construction to be interesting?
The Geo-Star Manufacturing Company is considering a new investment in a punch-press machinethat will cost $100,000 and has an annual maintenance cost of $10,000. There is also an additionaloverhauling cost of $20,000 for the equipment onceevery four years. Assuming that this equipment willlast infinitely under these conditions, what is thecapitalized equivalent cost of this investment at aninterest rate of 10%?
Your factory has been offered a contract to produce a part for a new printer. The contract would last for three years, and your cash flows from the contract would be $5.01 million per year. Your upfront setup costs to be ready to produce the part would be $7.97 million. Your discount rate for this contract is 7.7%. a. What is the IRR? b. The NPV is $5.01 million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV rule? a. What is the IRR? The IRR is %. (Round to two decimal places.) b. The NPV is $5.01 million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV rule? (Select from the drop-down menu.) The IRR rule with the NPV rule.
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A particular service can be purchased for $100 per unit. The same service can be provided by equipment that costs $400,000 today and has a salvage value of $250,000 after 10 years. Annual operating expenses will be $500 per year plus $2.00 per unit.a) If the estimates are correct, what will be the internal rate of return on the incremental investment if 400 units/year are produced.b) If the Attractive Minimum Rate of Return is 15% per year, what is the best alternative?
Your factory has been offered a contract to produce a part for a new printer. The contract would last for three years, and your cash flows from the contract would be $5.06 million per year. Your upfront setup costs to be ready to produce the part would be $7.97 million. Your discount rate for this contract is 8.1%. a. What is the IRR? b. The NPV is $5.05 million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV rule?
Your factory has been offered a contract to produce a part for a new printer. The contract would last for three years, and your cash flows from the contract would be $5.05 million per year. Your upfront setup costs to be ready to produce the part would be $7.97 million. Your discount rate for this contract is 8.2%. a. What is the IRR? b. The NPV is $5.00 million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV rule?