Question

In: Accounting

Basic Concepts Roberts Company is considering an investment in equipment that is capable of producing more...

Basic Concepts

Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is $2,293,200. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows:

Year Cash Revenues Cash Expenses
1 $2,981,160 $2,293,200
2 2,981,160 2,293,200
3 2,981,160 2,293,200
4 2,981,160 2,293,200
5 2,981,160 2,293,200

The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.

Required:

1. Compute the project’s payback period. If required, round your answer to two decimal places.
years

2. Compute the project’s accounting rate of return. Enter your answer as a whole percentage value (for example, 16% should be entered as "16" in the answer box).
%

3. Compute the project’s net present value, assuming a required rate of return of 10 percent. When required, round your answer to the nearest dollar.
$

4. Compute the project’s internal rate of return. Enter your answers as whole percentage values (for example, 16% should be entered as "16" in the answer box).

Between  % and  %

Solutions

Expert Solution

Year Cash Revenues Cash Expenses Net cash flow
1 $2,981,160 $2,293,200 687,960$
2 2,981,160 2,293,200 687,960
3 2,981,160 2,293,200 687,960
4 2,981,160 2,293,200 687,960
5 2,981,160 2,293,200 687,960$
Total 3,439,800

1. project’s payback period

initial outlay / cash flow per year

=2,293,200/687,960

=3.33 years

2. Compute the project’s accounting rate of return.

average net income /average investment

=687960$ /(2293200+0salvage)/2

=687960/1146600

=60%

3. Compute the project’s net present value, assuming a required rate of return of 10 percent. When required, round your answer to the nearest dollar.

year cash flow pv factor 10% Present value
0 (2,293,200) 1 (2,293,200) [2293200*1]
1-5 687,960 3.791 2,608,056$ [687960*3.791]
Net Present Value 314856$ [2608056-2293200]

4. project’s internal rate of return is the rate at which NPV becomes zero.

we will find NPV at random rates

r2 = 14%

year cash flow pv factor 142% Present value
0 (2,293,200) 1 (2,293,200) [2293200*1]
1-5 687,960 3.433 2,361,767$ [687960*3.433]
Net Present Value 68567$ [2361767-2293200]

r1 = 0.10

r2 = 0.14

npv 1 =314856

npv 2 =68567

IRR = R1 + (R2-R1)*NPV1/(NPV1-NPV2)

IRR = 0.10 + (0.14-0.10)*314856 / (314856-68567)

0.10 +12594.24/246289

=0.10+0.0511

=15%


Related Solutions

Basic Concepts Roberts Company is considering an investment in equipment that is capable of producing more...
Basic Concepts Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is $2,266,667. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows: Year Cash Revenues Cash Expenses 1 $2,970,000 $2,290,000 2 2,970,000 2,290,000 3 2,970,000 2,290,000 4 2,970,000 2,290,000 5 2,970,000 2,290,000 The present value tables provided in Exhibit 19B.1 and...
Basic Concepts Roberts Company is considering an investment in equipment that is capable of producing more...
Basic Concepts Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is $2,200,000. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows: Year Cash Revenues Cash Expenses 1 $2,960,000 $2,300,000 2 2,960,000 2,300,000 3 2,960,000 2,300,000 4 2,960,000 2,300,000 5 2,960,000 2,300,000 The present value tables provided in Exhibit 19B.1 and...
Roberts Company is considering an investment in equipment that is capable of producing more efficiently than...
Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is $2,066,667. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows: Year Cash Revenues Cash Expenses 1 $2,930,000 $2,310,000 2 2,930,000 2,310,000 3 2,930,000 2,310,000 4 2,930,000 2,310,000 5 2,930,000 2,310,000 1. Compute the project’s payback period. If required, round your answer...
Roten Manufacturing Company is considering an investment on a machine for producing auto parts. The machine...
Roten Manufacturing Company is considering an investment on a machine for producing auto parts. The machine costs $250,000 today, will have a five-year life and will be depreciated over a five-year life on a straight-line basis toward a zero salvage value. The company paid a consulting company $7,000 last year to help them decide whether there is a sufficient demand for the auto parts. In addition to the investment on the machine, the company also invests $15,000 in net working...
An electronics company estimated the investment cost for equipment for producing  replacement CCTV will be $800,000.  The operating...
An electronics company estimated the investment cost for equipment for producing  replacement CCTV will be $800,000.  The operating and maintenance cost is expected to be $500,000 per year with an annual revenues estimated at $650,000.  Considering MARR of 15% per year, find: The simple payback period=.......years   The discounted payback period=......years
Kentucky Hardware Company (KHC) is considering an investment project that requires a new machine for producing...
Kentucky Hardware Company (KHC) is considering an investment project that requires a new machine for producing special tools. This new machine costs $900,000 and will be depreciated over 5 years on a straight-line basis toward zero salvage value. KHC paid a consulting company $50,000 last year to help them decide whether there is sufficient demand for the special tools. In addition to the investment on the machine, KHC also invests $40,000 in net working capital. The company pays $58,800 in...
Kentucky Hardware Company (KHC) is considering an investment project that requires a new machine for producing...
Kentucky Hardware Company (KHC) is considering an investment project that requires a new machine for producing special tools.  This new machine costs $1,000,000 and will be depreciated over 10 years on a straight-line basis toward zero salvage value.  KHC paid a consulting company $50,000 last year to help them decide whether there is sufficient demand for the special tools.  In addition to the investment on the machine, KHC also invests $30,000 in net working capital.  The company pays $45,000 in interest expenses annually.  KHC has...
1. Zeebo company is considering investing $425,000 for new equipment. The new equipment is much more...
1. Zeebo company is considering investing $425,000 for new equipment. The new equipment is much more efficient than the current machine Zeebo is using. The machine will save $105,000/year in labor and other costs but will require annual maintenance costs of $13,000/year. The machine is expected to last 6 years and will have no salvage value. Estimate the project's Internal Rate of Return and Payback Period.
Cardinal Company is considering a project that would require a $2,985,000 investment in equipment with a...
Cardinal Company is considering a project that would require a $2,985,000 investment in equipment with a useful life of five years. At the end of five years, the project would terminate and the equipment would be sold for its salvage value of $400,000. The company’s discount rate is 16%. The project would provide net operating income each year as follows:      Sales $ 2,737,000      Variable expenses 1,001,000      Contribution margin 1,736,000      Fixed expenses:   Advertising, salaries, and other     fixed...
Cardinal Company is considering a project that would require a $2,985,000 investment in equipment with a...
Cardinal Company is considering a project that would require a $2,985,000 investment in equipment with a useful life of five years. At the end of five years, the project would terminate and the equipment would be sold for its salvage value of $400,000. The company’s discount rate is 16%. The project would provide net operating income each year as follows:      Sales $ 2,737,000      Variable expenses 1,001,000      Contribution margin 1,736,000      Fixed expenses:   Advertising, salaries, and other     fixed...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT