Melton Manufacturing Ltd is considering two alternative investment projects. The first project calls for a major renovation of the company's manufacturing facility. The second involves replacing just a few obsolete pieces of equipment in the facility. The company will choose one project or the other this year, but it will.not do both. The cash flows associated with each project appear below and the firm discounts project cash flows at 10%. Year Renovate Replace 0 -$4,000,000 -$1,300,000 1,000,000 700,000 300,000 150,000 150,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 4

Melton Manufacturing Ltd is considering two alternative investment projects. The first project calls for a major renovation of the company's manufacturing facility. The second involves replacing just a few obsolete pieces of equipment in the facility. The company will choose one project or the other this year, but it will.not do both. The cash flows associated with each project appear below and the firm discounts project cash flows at 10%. Year Renovate Replace 0 -$4,000,000 -$1,300,000 1,000,000 700,000 300,000 150,000 150,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 4

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 7PA: There are two projects under consideration by the Rainbow factory. Each of the projects will require...

See similar textbooks

Similar questions

Jasmine Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, and $2,000 for years 6 through 10. What is the payback period for this project?
Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required: 1. Patz Corporation is considering the purchase of a computer-aided manufacturing system. The cash benefits will be 800,000 per year. The system costs 4,000,000 and will last eight years. Compute the NPV assuming a discount rate of 10 percent. Should the company buy the new system? 2. Sterling Wetzel has just invested 270,000 in a restaurant specializing in German food. He expects to receive 43,470 per year for the next eight years. His cost of capital is 5.5 percent. Compute the internal rate of return. Did Sterling make a good decision?
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?
There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $35,000 and is expected to generate the following cash flows: Use the information from the previous exercise to calculate the internal rate of return on both projects and make a recommendation on which one to accept. For further instructions on internal rate of return in Excel, see Appendix C.
Your company is planning to purchase a new log splitter for is lawn and garden business. The new splitter has an initial investment of $180,000. It is expected to generate $25,000 of annual cash flows, provide incremental cash revenues of $150,000, and incur incremental cash expenses of $100,000 annually. What is the payback period and accounting rate of return (ARR)?
The management of Ryland International Is considering Investing in a new facility and the following cash flows are expected to result from the investment: A. What Is the payback period of this uneven cash flow? B. Does your answer change if year 6s cash inflow changes to $920,000?
Garnette Corp is considering the purchase of a new machine that will cost $342,000 and provide the following cash flows over the next five years: $99,000, $88,000, $92,000. $87,000, and $72,000. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return in Excel. see Appendix C.
Manzer Enterprises is considering two independent investments: A new automated materials handling system that costs 900,000 and will produce net cash inflows of 300,000 at the end of each year for the next four years. A computer-aided manufacturing system that costs 775,000 and will produce labor savings of 400,000 and 500,000 at the end of the first year and second year, respectively. Manzer has a cost of capital of 8 percent. Required: 1. Calculate the IRR for the first investment and determine if it is acceptable or not. 2. Calculate the IRR of the second investment and comment on its acceptability. Use 12 percent as the first guess. 3. What if the cash flows for the first investment are 250,000 instead of 300,000?
There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $35,000 and is expected to generate the following cash flows: If the discount rate is 12%, compute the NPV of each project.
Gallant Sports s considering the purchase of a new rock-climbing facility. The company estimates that the construction will require an initial outlay of $350,000. Other cash flows are estimated as follows: Assuming the company limits its analysis to four years due to economic uncertainties, determine the net present value of the rock-climbing facility. Should the company develop the facility if the required rate of return is 6%?
There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment or $28.000 and is expected to generate the following cash flows: If the discount rate is 5% compute the NPV of each project and make a recommendation of the project to be chosen.
Buena Vision Clinic is considering an investment that requires an outlay of 600,000 and promises a net cash inflow one year from now of 810,000. Assume the cost of capital is 10 percent. Required: 1. Break the 810,000 future cash inflow into three components: a. The return of the original investment b. The cost of capital c. The profit earned on the investment 2. Now, compute the present value of the profit earned on the investment. 3. Compute the NPV of the investment. Compare this with the present value of the profit computed in Requirement 2. What does this tell you about the meaning of NPV?