ACC 560 Week 8 Homework
E12-3
Hillsong Inc. manufactures snowsuits. Hillsong is considering purchasing a new
sewing machine at a cost of $2.45 million. Its existing machine was purchased
five years ago at a price of $1.8 million; six months ago, Hillsong spent
$55,000 to keep it operational. The existing sewing machine can be sold today
for $250,000. The new sewing machine would require a one-time, $85,000 training
cost. Operating costs would decrease by the following amounts for years 1 to 7:
Year 1 $390,000
2 400,000
3 411,000
4 426,000
5 434,000
6 435,000
7 436,000
The new
sewing machine would be depreciated according to the declining-balance method
at a rate of 20%. The salvage value is expected to be $400,000. This new
equipment would require maintenance costs of $100,000 at the end of the fifth
year. The cost of capital is 9%.
Instructions
Use the net
present value method to determine whether Hillsong should purchase the new
machine to replace the existing machine, and state the reason for your
conclusion. (CGA adapted)
E12-5 Bruno
Corporation is involved in the business of injection molding of plastics. It is
considering the purchase of a new computer-aided design and manufacturing
machine for $430,000. The company believes that with this new machine it will
improve productivity and increase quality, resulting in an increase in net
annual cash flows of $101,000 for the next 6 years. Management requires a 10%
rate of return on all new investments.
Instructions
Calculate
the internal rate of return on this new machine. Should the investment be
accepted?
E12-8
Pierre's Hair Salon is considering opening a new location in French Lick,
California. The cost of building a new salon is $300,000. A new salon will
normally generate annual revenues of $70,000, with annual expenses (including
depreciation) of $41,500. At the end of 15 years the salon will have a salvage
value of $80,000.
Instructions
Calculate
the annual rate of return on the project.
P12-4A
Jane's Auto Care is considering the purchase of a new tow truck. The garage
doesn't currently have a tow truck, and the $60,000 price tag for a new truck
would represent a major expenditure. Jane Austen, owner of the garage, has
compiled the estimates shown below in trying to determine whether the tow truck
should be purchased.
Initial cost $60,000
Estimated useful life 8 years
Net annual cash flows from towing $8,000
Overhaul costs (end of year 4) $6,000
Salvage value $12,000
Jane's good
friend, Rick Ryan, stopped by. He is trying to convince Jane that the tow truck
will have other benefits that Jane hasn't even considered. First, he says, cars
that need towing need to be fixed. Thus, when Jane tows them to her facility,
her repair revenues will increase. Second, he notes that the tow truck could
have a plow mounted on it, thus saving Jane the cost of plowing her parking
lot. (Rick will give her a used plow blade for free if Jane will plow Rick's
driveway.) Third, he notes that the truck will generate goodwill; people who
are rescued by Jane's tow truck will feel grateful and might be more inclined
to use her service station in the future or buy gas there. Fourth, the tow
truck will have “Jane's Auto Care” on its doors, hood, and back tailgate—a form
of free advertising wherever the tow truck goes. Rick estimates that, at a
minimum, these benefits would be worth the following.
Additional annual net cash flows
from repair work $3,000
Annual savings from plowing 750
Additional annual net cash flows
from customer “goodwill” 1,000
Additional annual net cash flows
resulting from free advertising 750
The
company's cost of capital is 9%.
Instructions
1 Calculate the net present value, ignoring the additional benefits
described by Rick. Should the tow truck be purchased?
2 Calculate the net present value, incorporating the additional benefits
suggested by Rick. Should the tow truck be purchased?
3 Suppose Rick has been overly optimistic in his assessment of the value of
the additional benefits. At a minimum, how much would the additional benefits
have to be worth in order for the project to be accepted?
TUTORIAL PREVIEW
|
|
Year
|
Discount
Factor @ 9%
|
Amount
|
Present
Value
|
|
Cash
flows
|
1
|
0.91743
|
390,000
|
357,798
|
|
|
2
|
0.84168
|
400,000
|
336,672
|
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