Question

24. Taylor Trucking is considering purchasing a new truck. It is expected the truck will increase annual revenues by $31,000 and increase annual expenses by $19,800 including depreciation. The truck will cost $110,000 and will have a $2,000 salvage value at the end of its useful life. Compute the annual rate of return.

20%

20.7%

10%

10.2%

23. Evergreen Co. is contemplating the purchase of a new machine that has expected annual net cash inflows of $25,000 over its 3 year life. The net present value of the investment is $3,275; assuming a 9% discount rate. The present value factors from the present value of 1 table and the present value of an annuity table are .772 and 2.531, respectively. Compute the profitability index.

1.15

1.05

0.77

1.19

18. If an asset costs $250000 and is expected to have a $50000 salvage value at the end of its 10-year life, and generates annual net cash inflows of $50000 each year, the cash payback period is

6 years.

5 years.

3 years.

4 years.

11. SwiftyCompany is considering two capital investment proposals. Estimates regarding each project are provided below:

	Project Soup	Project Nuts
Initial investment	$400000	$600000
Annual net income	12000	28000
Net annual cash inflow	90000	113000
Estimated useful life	5 years	6 years
Salvage value	0	0

The company requires a 10% rate of return on all new investments.

	Present Value of an Annuity of 1
Periods	9%	10%	11%	12%
5	3.89	3.791	3.696	3.605
6	4.486	4.355	4.231	4.111

The annual rate of return for Project Soup is

3.0%.

22.5%.

45%.

6%.

12. Use the following table,

	Present Value of an Annuity of 1
Period	8%	9%	10%
1	0.926	0.917	0.909
2	1.783	1.759	1.736
3	2.577	2.531	2.487

A company has a minimum required rate of return of 8%. It is considering investing in a project that costs $349278 and is expected to generate cash inflows of $138000 each year for three years. The approximate internal rate of return on this project is

9%.

10%.

8%.

the IRR on this project cannot be approximated.

Answer 1

Ans- 24	20%
	Calculation of Annual Rate of Return:-
	Annual rate of Return	=	Average Annual Net Income
			Average Investment
a	Annual Net Income (31000-19800)		$     11,200
b	Average Investment ((110000+2000)/2)		$     56,000
c	Annual rate of Return (a/b *100)		20.00%

Ans- 23	1.05
	Calculation of Profitability Index :-
				Option B
a	Annual Net Cash Inflows			$25,000
b	Present Value Annuity factor			2.531
c	Present Value of Net Cash Inflows (a*b)			$63,275
d	Net Present Value of Investment			$3,275
e	Initial Investment (c-d)			$60,000
f	Profitability Index (c/e)	=		1.05
Ans- 18	5 years
a.	Computation of Cash Payback period   :-
a	Initial Investment	=	$   250,000
b	Estimated Annual Net Cash inflows	=	$     50,000
c	Payback period (years) (a/b)	=	5.00	years
Ans- 11	6%
	Calculation of Annual Rate of Return:-
	Annual rate of Return	=	Average Annual Net Income
			Average Investment
a	Annual Net Income		$     12,000
b	Average Investment ((400000+0)/2)		$   200,000
c	Annual rate of Return (a/b *100)		6.00%
Ans- 12	9%
	Calculation of internal rate of return :-
	At IRR, Present Value of Cash Inflows = Initial Investment
	Present Value of Cash Inflows - Initial Investment = 0
	i.e. NPV = 0
a	Initial Investment	=	$   349,278
b	Estimated Annual Cash inflows	=	$   138,000
c	Present Value of an Annuity of Rs.1 @ IRR% for 5 years required (a/b)	=	2.531
	From the present value of annuity table, At 9% , PVAF = 2.531 , So IRR = 9%

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