Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN: 9781305970663
Author: Don R. Hansen, Maryanne M. Mowen
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 19, Problem 25P
1.
To determine
Compute the
2.
To determine
Compute the net present value for each investment using 14% discount rate.
3.
To determine
Identify the discount rate that would be more appropriate to compute the net present value.
4.
To determine
Calculate the net present value of the traditional equipment if cash flows are decreased by 50% for Years 3-10.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Mitchell Company is considering an investment in a new machine. Managers at the company are uncertain about the economic life of the machine, because of the speed of innovation in the technology. The machine requires an investment of $1.60 million. After-tax cash flows are estimated to be $455,711 each year the machine is operating (and not obsolete). The company uses a 14 percent discount rate in evaluating capital investments. Use Exhibit A.9. Required: What is the minimum economic life of the machine (in whole years) that would be required for it to have a positive net present value?
Required:
What is the minimum economic life of the machine (in whole years) that would be required for it to have a positive net present value?
Buhler Industries is a farm implement manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight tractors. Buhler plans to use a cost of capital of 12 % to evaluate this project. Based on extensive research, it has prepared the following incomplete incremental free cash flow projections (in millions of dollars): The relevant CCA rate for the capital expenditures is 10%. Assume assets are never sold. a. For this base-case scenario, what is the NPV of the plant to manufacture lightweight tractors? b. Based on input from the marketing department, Buhler is uncertain about its revenue forecast. In particular, management would like to examine the sensitivity of the NPV to the revenue assumptions. What is the NPV of this project if revenues are 10 % higher than forecast? What is the NPV of this project if revenues are 10 % lower than forecast?
Hook Industries is considering the replacement of one of its old metal stamping machines. Three alternative replacement machines are under consideration. The cash flows associated with each are shown in the following table attached:
.
The firm's cost of capital is 10%.
a. Calculate the net present value (NPV) of each press.
b. Using NPV, evaluate the acceptability of each press.
c. Rank the presses from best to worst using NPV.
Chapter 19 Solutions
Cornerstones of Cost Management (Cornerstones Series)
Ch. 19 - Explain the difference between independent...Ch. 19 - Explain why the timing and quantity of cash flows...Ch. 19 - Prob. 3DQCh. 19 - Prob. 4DQCh. 19 - What is the accounting rate of return?Ch. 19 - What is the cost of capital? What role does it...Ch. 19 - Prob. 7DQCh. 19 - Explain how the NPV is used to determine whether a...Ch. 19 - Explain why NPV is generally preferred over IRR...Ch. 19 - Prob. 10DQ
Ch. 19 - Prob. 11DQCh. 19 - Prob. 12DQCh. 19 - Prob. 13DQCh. 19 - Prob. 14DQCh. 19 - Prob. 15DQCh. 19 - Jan Booth is considering investing in either a...Ch. 19 - Prob. 2CECh. 19 - Carsen Sorensen, controller of Thayn Company, just...Ch. 19 - Manzer Enterprises is considering two independent...Ch. 19 - Keating Hospital is considering two different...Ch. 19 - Prob. 6CECh. 19 - Prob. 7ECh. 19 - Prob. 8ECh. 19 - Each of the following scenarios is independent....Ch. 19 - Roberts Company is considering an investment in...Ch. 19 - NPV A clinic is considering the possibility of two...Ch. 19 - Refer to Exercise 19.11. 1. Compute the payback...Ch. 19 - Buena Vision Clinic is considering an investment...Ch. 19 - Consider each of the following independent cases....Ch. 19 - Gina Ripley, president of Dearing Company, is...Ch. 19 - Covington Pharmacies has decided to automate its...Ch. 19 - Postman Company is considering two independent...Ch. 19 - Prob. 18ECh. 19 - Prob. 19ECh. 19 - Prob. 20ECh. 19 - Assume there are two competing projects, X and Y....Ch. 19 - Prob. 22ECh. 19 - Assume that an investment of 100,000 produces a...Ch. 19 - Prob. 24PCh. 19 - Prob. 25PCh. 19 - Prob. 26PCh. 19 - Kent Tessman, manager of a Dairy Products...Ch. 19 - Friedman Company is considering installing a new...Ch. 19 - Okmulgee Hospital (a large metropolitan for-profit...Ch. 19 - Mallette Manufacturing, Inc., produces washing...Ch. 19 - Jonfran Company manufactures three different...Ch. 19 - Prob. 32P
Knowledge Booster
Similar questions
- Marvin Industries must choose between an electric-powered and a coal-powered forklift machine for its factory. Because both machines perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered machine will cost more, but it will be less expensive to operate; it will cost $102,000, whereas the coal-powered machine will cost $69,500. The cost of capital that applies to both investments is 10%. The life for both types of machines is estimated to be 6 years, during which time the net cash flows for the electric-powered machine will be $26,150 per year, and those for the coal-powered machine will be $20,000 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of machine, and decide which to recommendarrow_forwardYour company is evaluating an investment project. The project would require buying a piece of machinery that costs $23.43 million dollars. As part of the effort to raise money for the project, your company will also sell an old piece of machinery right away which will generate an estimated after-tax salvage of $11.39 million dollars. Assuming the above are all the investment-related activities for your company. What're the project's initial cash flows from investing activities? Note: your answer should be in millions of dollars.arrow_forwardThe management of Ro Corporation is investigating automating a process. Old equipment, with a current salvage value of $11,000, would be replaced by a new machine. The new machine would be purchased for $243,000 and would have a 9 year useful life and no salvage value. By automating the process, the company would save $69,000 per year in cash operating costs. The simple rate of return on the investment is closest to (Ignore income taxes.): 18.1% 11.1% 28.4% 17.3%arrow_forward
- The Chihiro Co. is considering two investments to move materials and supplies around its factory: 1) a conveyor belt system; and 2) a fleet of forklift trucks. The initial costs of each approach today, and the future annual cash operating costs for each investment for the following five years (the estimated useful life of each investment, after which they will be worth nothing), are as follows (hint: all of these numbers represent costs, i.e., cash outlays): Assume the appropriate required rate of return to use in analyzing these cash flows = 10%. TIME 0 1 2 3 4 ANNUAL COST, CONVEYER $500,000 $120,000 $120,000 $120,000 $120,000 $20,000 ANNUAL COST, FORKLIFTS $200,000 $160,000 $160,000 $160,000 $160,000 $160,000 A) What is the IRR of each alternative? Hint: what are the signs of each of the cash flows? B) What is your recommendation for the best investment for the company? Why?arrow_forwardThe management of Ro Corporation is investigating automating a process. Old equipment, with a current salvage value of $21,000, would be replaced by a new machine. The new machine would be purchased for $462,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $159,000 per year in cash operating costs. The simple rate of return on the investment is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.) Garrison_16e_Rechecks_2019_10_12 Multiple Choice 18.6% 17.7% 34.4% 16.7%arrow_forwardThe management of Roberts Corporation is investigating automating a process. Old equipment, with a current salvage value of $11,000, would be replaced by a new machine. The new machine would be purchased for $243,000 and would have a 9 year useful life and no salvage value. By automating the process, the company would save $69,000 per year in cash operating costs. The simple rate of return on the investment is closest to (Ignore income taxes.): 18.1% O 11.1% O 28.4% O 17.3%arrow_forward
- Dwight Donovan, the president of Donovan Enterprises, is considering two investment opportunities. Because of limited resources, he will be able to invest in only one of them. Project A is to purchase a măchine that will enable factory automation; the machine is expected to have a useful life of fouryears and no salvage value. Project B supports a rano oOB and for Project B are $160,000. The operating the current equipment. Initial cash expenditures for Project A are S annual expected cash inflows are $126,000 for Project A and $52,800 for Projęct B. Bọth investménts are expected to provide cash flow benefits for the next four years. Donovan Enterprises' desired rate of return is 8 percent. program that will improve the skills of employees Page 472 Required 2 Compute the net present value of each project. Which project should be adopted based on the net present value approach? Round your computations to two decimal points. D. Compute the approximate internal rate of return of each…arrow_forwardHypore Darby Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $348,400. The annual cost savings if the new machine is acquired will be $80,000. The machine will have a 6-year life, at which time the terminal disposal value is expected to be zero. Hypore Park Department is assuming no tax consequences. What is the internal rate of return for Hypore Park Department? Question 6 options: 11% 9% 5% 10%arrow_forwardBlue Sky Corporation is trying to decide whether to invest in equipment to manufacture a new product. If the investment project is accepted, sales revenue will increase by $78,000 per year and materials costs will decrease by $47,000 per year. The equipment will cost $244,000 and is depreciable over 14 years using simplified straight line (zero salvage value). The firm has a marginal tax rate of 34%. Calculate the firm's annual cash flows resulting from the new project. ENTER YOUR ANSWER IN THE SPACE PROVIDED. DO NOT ENTER THE DOLLAR SIGN.arrow_forward
- Your company is currently considering two investment projects. Each project requires an upfront expenditure of $25 million. You estimate that the cost of capital is 10% and the investments will produce the after tax cash flows on the attached image . a)Calculate the payback period for both projects,then compare to identify which project the firm should undertake. b)Evaluate the advantages and disadvantages of using the payback method in investment decisions and assess the situations where it should be used .arrow_forwardBilly Gaffney, a manager of the Plate Division for the Red Dog Manufacturing Company, has the opportunity to expand the division by investing in additional machinery costing $430,000. He would depreciate the equipment using the straight-line method, and expects it to have no residual value. It has a useful life of 8 years. The firm mandates a required after-tax rate of return of 12% on investments. Billy estimates annual net cash inflows for this investment of $110,000 before taxes, and an investment in working capital of $7,500. Tax rate is 30%. REQUIRED 1. Calculate the net present value of this investment. 2. Calculate the accrual accounting rate of return on initial investment for this project. 3. Should Billy accept the project? Will Billy accept the project if his bonus depends on achieving an accrual accounting rate of return of 12%? How can this conflict be resolved?arrow_forwardLiam Rivera, a manager of the Plate Division for the Formica Farm Manufacturing Company, has the opportunity to expand the division by investing in additional machinery costing $430,000. He would depreciate the equipment using the straight-line method, and expects it to have no residual value. It has a useful life of 8 years. The firm mandates a required after-tax rate of return of 12% on investments. Liam estimates annual net cash inflows for this investment of $110,000 before taxes, and an investment in working capital of $7,500. Tax rate is 30%. 1. Calculate the net present value of this investment. 2. Calculate the accrual accounting rate of return on initial investment for this project. 3. Should Liam accept the project? Will Liam accept the project if his bonus depends on achieving an accrual accounting rate of return of 12%? How can this conflict be resolved?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning