Question

The management of Kunkel Company is considering the purchase of a $31,000 machine that would reduce operating costs by $8,500 per year. At the end of the machine’s five-year useful life, it will have zero scrap value. The company’s required rate of return is 13%.

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

    

Required:
1.	Determine the net present value of the investment in the machine.

     

2.

What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? (Any cash outflows should be indicated by a minus sign.) The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $43,000. The machine would replace an old piece of equipment that costs $11,000 per year to operate. The new machine would cost $5,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a scrap value of $18,000. The new machine would have a useful life of 10 years with no salvage value.    Required: Compute the simple rate of return on the new automated bottling machine. The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $43,000. The machine would replace an old piece of equipment that costs $11,000 per year to operate. The new machine would cost $5,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a scrap value of $18,000. The new machine would have a useful life of 10 years with no salvage value.    Required: Compute the simple rate of return on the new automated bottling machine. Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, Inc., to dispense frozen yogurt products under The Yogurt Place name. Mr. Swanson has assembled the following information relating to the franchise:     a. A suitable location in a large shopping mall can be rented for $3,500 per month. b. Remodeling and necessary equipment would cost $318,000. The equipment would have a 20-year life and an $15,900 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation. c. Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $380,000 per year. Ingredients would cost 20% of sales. d. Operating costs would include $78,000 per year for salaries, $4,300 per year for insurance, and $35,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Inc., of 11.5% of sales.    Required: 1. Prepare a contribution format income statement that shows the expected net operating income each year from the franchise outlet.       2a. Compute the simple rate of return promised by the outlet. (Round percentage answer to 1 decimal place. i.e. 0.123 should be considered as 12.3%.)         2b. If Mr. Swanson requires a simple rate of return of at least 23%, should he acquire the franchise? Yes No    3a. Compute the payback period on the outlet. (Round your answer to 1 decimal place.)         3b. If Mr. Swanson wants a payback of three years or less, will he acquire the franchise? Yes No The Sweetwater Candy Company would like to buy a new machine that would automatically “dip” chocolates. The dipping operation is currently done largely by hand. The machine the company is considering costs $220,000. The manufacturer estimates that the machine would be usable for five years but would require the replacement of several key parts at the end of the third year. These parts would cost $10,300, including installation. After five years, the machine could be sold for $6,000.       The company estimates that the cost to operate the machine will be $8,300 per year. The present method of dipping chocolates costs $43,000 per year. In addition to reducing costs, the new machine will increase production by 5,000 boxes of chocolates per year. The company realizes a contribution margin of $1.50 per box. A 15% rate of return is required on all investments.    Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.      Required: 1. What are the annual net cash inflows that will be provided by the new dipping machine?       2. Compute the new machine’s net present value. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s) and final answers to the nearest whole dollar amount.) Julie has just retired. Her company’s retirement program has two options as to how retirement benefits can be received. Under the first option, Julie would receive a lump sum of $137,000 immediately as her full retirement benefit. Under the second option, she would receive $26,000 each year for seven years plus a lump-sum payment of $56,000 at the end of the seven-year period.    Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. Required: 1a. Calculate the present value for the following assuming that the money can be invested at 14%. (Use the appropriate table to determine the discount factor(s).)        1b. If you can invest money at a 14% return, which option would you prefer? First option Second option

     

Answer 1

1) NPV = sum of discounted cahs inflows - cash outflows

Year	Cash flow	Cost of capital	PV of cash flows
0	-$31,000	$1	-$31,000
1	$8,500	$0.885	$7,522
2	$8,500	$0.783	$6,657
3	$8,500	$0.693	$5,891
4	$8,500	$0.613	$5,213
5	$8,500	$0.543	$4,613
		NPV	-$1,104

2) Difference between the undiscounted total cash inflows and outflows = cash inflows - cash outflows

= $42500 - (-31000)

= $11,500

New Automated Bottling machine

Simple rate of return = average net profit / initial investment

= 1700 / 25000

= 6.8%

Working:

Average net profit = savings in operating costs - depreciation

= 11000 - 5000 - 4300

= $1700

Initial investment

Cost of machine	$43,000
Salvage of old machine	$18,000
Net investment	$25,000

The Yogert Place

1) Contribution margin income statement

Income Statement
Sales		$3,80,000
Less: variable cost
Ingredients	$76,000
Commission	$43,700
Total variable costs		$1,19,700
Contribution margin		$2,60,300
Less: fixed costs
Rent	$42,000
salaries	$78,000
Insurance	$4,300
Utilities	$35,000
Depreciation	$15,105
Total fixed costs		$1,74,405
Operating income		$85,895

2a) Simple rate of return = net income / investment

= 85895 / 318000

= 27%

2b) If Mr. Swanson requires a minimum rate of return of 23%, he should accept the project as the return is higher than 23%.