The Dental Clinic, Inc. is contemplating replacing an obsolete word processing system with one of two innovative lines of equipment. Alternative 1 requires a current investment layout of $26,022, whereas alternative 2 requires an outlay of $31,048. The following cash flows (cost savings) will be generated each year over the five-year useful lives of the new systems. Probability Cash Flow $7,000 10,000 13,000 $7,500 10,000 12,500 Alternative 1 0.32 0.36 0.32 Alternative 2 0.18 0.64 0.18 6a) Calculate the expected cash flow for each investment alternative. 42 1

The Dental Clinic, Inc. is contemplating replacing an obsolete word processing system with one of two innovative lines of equipment. Alternative 1 requires a current investment layout of $26,022, whereas alternative 2 requires an outlay of $31,048. The following cash flows (cost savings) will be generated each year over the five-year useful lives of the new systems. Probability Cash Flow $7,000 10,000 13,000 $7,500 10,000 12,500 Alternative 1 0.32 0.36 0.32 Alternative 2 0.18 0.64 0.18 6a) Calculate the expected cash flow for each investment alternative. 42 1

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter12: Capital Investment Decisions

Section: Chapter Questions

Problem 21BEA

See similar textbooks

Similar questions

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?
Consolidated Aluminum is considering the purchase of a new machine that will cost $308,000 and provide the following cash flows over the next five years: $88,000, 92,000, $91,000, $72,000, and $71,000. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return in Excel, see Appendix C.
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.
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)?
If a copy center is considering the purchase of a new copy machine with an initial investment cost of $150,000 and the center expects an annual net cash flow of $20,000 per year, what is the payback period?
Covington Pharmacies has decided to automate its insurance claims process. Two networked computer systems are being considered. The systems have an expected life of two years. The net cash flows associated with the systems are as follows. The cash benefits represent the savings created by switching from a manual to an automated system. The companys cost of capital is 10 percent. Required: 1. Compute the NPV and the IRR for each investment. 2. Show that the project with the larger NPV is the correct choice for the company.
The production department is proposing the purchase of an automatic insertion machine. It has identified 3 machines, each with an estimated life of 10 years. Which machine offers the best internal rate of return? Annual net cash flows Average investment Machine A only Machine B only Machine C only O Machines A and B Machine A $ 50,000 250,000 Machine B $ 40,000 300,000 Machine $ 75,000 500,000
Management of Blossom Mints, a confectioner, is considering purchasing a new jelly bean-making machine at a cost of $312,500. They project that the cash flows from this investment will be $75,000 for the next seven years. If the appropriate discount rate is 14 percent, what is the NPV for the project? - NPV $?
Mendez Company is considering a capital project that costs $16,000. The project will deliver the following cash flows: Year 5 Year 4 $6,000 $5,000 $5,000 Using the incremental approach, the payback period for the investment is: Year 1 $8,000 Year 2 $6,000 Multiple Choice 2 years. 2.4 years. 5 years. 1.66 years. Year 3
As an engineer, you are responsible to find the best alternative that is economically best. The cash flows shown in the table and the MARR is 11 % per year. Then please answer the following questions. Cash Flow Project 01 Project 02 Project 03 First Cost, $ 80000 290000 190000 Annual Cost, S Per Year 30000 21000 18000 Overhaul Every 10 Years, $ Salvage Value, $ Life, Years -90000 8000 28000 57000 10 a) Find the Aw for Project 01. Answer b) calculate the AW for Project 02 Answer: c) Calculate Aw for Project 03
Ingersoll Antiques is considering two projects. Their required rate of return is 10%. Project Initial investment cost Annual cash flows Life of the project A B $160,000 $170,000 $56,557 $47,157 3 years 5 years a) Compute the present value factor and the IRR for the two projects. Please make sure your final answers for the present value factor are accurate to 3 decimal places and the ones for the IRR are accurate to the nearest whole percent. Project Present value factor IRR A B b) Which project would Ingersoll Antiques most likely invest in? O Project A O Project B O Neither
The ABC Resort is redoing its golf course at a cost of $843,000. It expects to generate cash flows of $593,000, $743,000 and $129,000 over the next three years. If the appropriate discount rate for the company is 17.5 percent, what is the NPV of this project (to the nearest dollar)? O a. $279363 O b. $373541 O c. $1965363 O d. $112202