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MGMT 312,I.
Module 9 Review Questions
Payback period and computation; even cash flowsCompute the payback period for each of the following two separate investments (round thepayback period to two decimals):1. A new operating system for an existing machine is expected to cost $260,000 and have auseful life of five years. The system yields an incremental after-tax income of $75,000each year after deducting its straight-line depreciation. The predicted salvage value ofthe system is $10,000.2. A machine costs $190,000, has a $10,000 salvage value, is expected to last nine years.
II.
Payback period computation; uneven cash flowsWenro Company is considering the purchase of an asset for $90,000. It is expectedto produce the following net cash flows. The cash flows occur evenly throughouteach year. Compute the payback period for this investment.
III.
Accounting Rate of ReturnA machine costs $500,000 and is expected to yield an after-tax net income of$15,000 each year. Management predicts this machine has a 10-year service lifeand a $100,000 salvage value, and it uses straight-line depreciation. Compute thismachineâ€s accounting rate of return.
IV.
Computing Net Present ValueK2B Company is considering the purchase of equipment that would allow thecompany to add a new product to its line. The equipment is expected to cost$240,000 with a 12-year life and no salvage value. It will be depreciated on astraight-line basis. The company expects to sell 96,000 units of the equipmentâ€sproduct each year. The expected annual income related to this equipment follows:
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MGMT 312,
Module 9 Review Questions
K2B concludes that the investment must earn at least an 8% return. Compute thenet present value of this investment. (Round the net present value to the nearestdollar.)V.
Net Present ValueInterstate Manufacturing is considering either replacing one of its old machines witha new machine or having the old machine overhauled. Information about the twoalternatives follows. Management requires a 10% rate of return on its investments.Alternative 1: Keep the old machine and have it overhauled. If the old machine isoverhauled, it will be kept for another five years and then sold for its salvage value.
Alternative 2: Sell the old machine and buy a new one. The new machine will bemore efficient and will yield substantial operating cost savings with more productsproduced and sold.
1. Determine the net present value of alternative 1.2. Determine the net present value of alternative 2.
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MGMT 312,
Module 9 Review Questions
3. Which alternative do you recommend management select? Explain.
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