Question

1. 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 $240,438. 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		$390,900
	2		399,800
	3		410,100
	4		425,400
	5		434,000
	6		434,900
	7		436,400

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 $379,100. This new equipment would require maintenance costs of $94,000 at the end of the fifth year. The cost of capital is 9%.

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Use the net present value method to determine the following: (If net present value is negative then enter with negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round present value answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Calculate the net present value.

Net present value

$enter the net present value in dollars rounded to 0 decimal places

Determine whether Hillsong should purchase the new machine to replace the existing machine?

select an option                                                          YesNo

2.

Iggy Company is considering three capital expenditure projects. Relevant data for the projects are as follows.

Project		Investment		Annual Income		Life of Project
22A		$243,500		$17,320		6 years
23A		271,400		20,600		9 years
24A		283,000		15,700		7 years

Annual income is constant over the life of the project. Each project is expected to have zero salvage value at the end of the project. Iggy Company uses the straight-line method of depreciation.

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(a)

Determine the internal rate of return for each project. (Round answers 0 decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Project		Internal Rate of Return
22A		%
23A		%
24A		%

(b)

If Iggy Company’s required rate of return is 11%, which projects are acceptable?

The following project(s) are acceptable                                                           22A and 24A22A and 23A23A and 24A22A24A22A, 23A and 24A23A

3. Vilas Company is considering a capital investment of $196,000 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $13,034 and $49,000, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment.

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(a)

Compute the cash payback period. (Round answer to 1 decimal place, e.g. 10.5.)

Cash payback period

years

Compute the annual rate of return on the proposed capital expenditure. (Round answer to 2 decimal places, e.g. 10.52%.)

Annual rate of return

%

(b)

Using the discounted cash flow technique, compute the net present value. (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round answer for present value to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Net present value

Answer 1

The following is the answer to Question No.1