Question

1. The following data are accumulated by Paxton Company in evaluating the purchase of $127,800 of equipment, having a four-year useful life:

	Net Income		Net Cash Flow
Year 1	$30,000		$50,000
Year 2	18,000		39,000
Year 3	9,000		29,000
Year 4	(1,000)		20,000

Present Value of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	0.792	0.683	0.636	0.572	0.482
5	0.747	0.621	0.567	0.497	0.402
6	0.705	0.564	0.507	0.432	0.335
7	0.665	0.513	0.452	0.376	0.279
8	0.627	0.467	0.404	0.327	0.233
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

a. Assuming that the desired rate of return is 10%, determine the net present value for the proposal. Use the table of the present value of $1 presented above. If required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.

Present value of net cash flow	$
Amount to be invested	$
Net present value	$

b. Would management be likely to look with favor on the proposal? __________
The net present value indicates that the return on the proposal is _____ than the minimum desired rate of return of 10%.

2. Bi-Coastal Railroad Inc. is considering acquiring equipment at a cost of $245,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $49,000. The company’s minimum desired rate of return for net present value analysis is 15%.

Present Value of an Annuity of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.353	2.991
6	4.917	4.355	4.111	3.785	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

Compute the following:

a. The average rate of return, assuming the annual earnings are equal to the net cash flows less the annual depreciation expense on the equipment. If required, round your answer to one decimal place.
________ %

b. The cash payback period.
______ years

c. The net present value. Use the above table of the present value of an annuity of $1. Round to the nearest dollar. If required, use a minus sign to indicate negative net present value" for current grading purpose.

Present value of annual net cash flows	$
Less amount to be invested	$
Net present value	$

3. The internal rate of return method is used by King Bros. Construction Co. in analyzing a capital expenditure proposal that involves an investment of $48,535 and annual net cash flows of $17,000 for each of the four years of its useful life.

Present Value of an Annuity of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.352	2.991
6	4.917	4.355	4.111	3.784	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

a. Determine a present value factor for an annuity of $1 which can be used in determining the internal rate of return. If required, round your answer to three decimal places.

_____________

b. Using the factor determined in part (a) and the present value of an annuity of $1 table above, determine the internal rate of return for the proposal.
________%

4. The capital investment committee of Ellis Transport and Storage Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows:

	Warehouse					Tracking Technology
Year	Income from Operations		Net Cash Flow			Income from Operations		Net Cash Flow
1	$68,200		$210,000			$143,000		$336,000
2	68,200		210,000			109,000		284,000
3	68,200		210,000			55,000		200,000
4	68,200		210,000			24,000		137,000
5	68,200		210,000			10,000		93,000
Total	$341,000		$1,050,000			$341,000		$1,050,000

Each project requires an investment of $620,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis.

Present Value of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	0.792	0.683	0.636	0.572	0.482
5	0.747	0.621	0.567	0.497	0.402
6	0.705	0.564	0.507	0.432	0.335
7	0.665	0.513	0.452	0.376	0.279
8	0.627	0.467	0.404	0.327	0.233
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

Required:

1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place.

	Average Rate of Return
Warehouse	%
Tracking Technology	%

1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value.

	Warehouse	Tracking Technology
Present value of net cash flow total	$	$
Less amount to be invested	$	$
Net present value	$	$

2. The warehouse has a _____ net present value as tracking technology cash flows occur _____ in time. Thus, if only one of the two projects can be accepted, the ______ would be the more attractive.

Answer 1

1-
Year	net cash flow	present value of cash flow = cash flow/(1=r)^n r= 10%
0	-127800	-127800
1	50000	45454.55
2	39000	32231.4
3	29000	21788.13
4	20000	13660.27
Net present value	sum of present value of cash flow	-14666
B-	No management would not like the favor of project as its NPV is negative	Lower
2-	Average rate of return	annual earning/initial investment	24500/245000	10%
	annual earning - net cash flow-depreciation	49000-24500	24500
	Initial investment		245000
	Payback period in Years	initial investment/net cash flow	245000/49000	5
	Net present value
	Sum of present value of net cash inflow = net cash inflow *PVAF at 15%	49000*5.019	245931
	present value of cash outflow		245000
	NPV		931
3-	Payback period in Years	initial investment/net cash flow	48535/17000	2.855
	present value annuity factor used to calculate IRR			2.855
	IRR			15%
4-	Warehouse
	Average rate of return	annual earning/initial investment	68200/620000	11.00%
	tracking technology
	Average rate of return	68200/620000	11%
	average profit	(143000+109000+55000+24000+10000)/5	68200
	year	net cash flow	present value of cash flow = cash flow/(1=r)^n r= 12%%
	0	-620000	-620000
	1	210000	187500
	2	210000	167410.7
	3	210000	149473.9
	4	210000	133458.8
	5	210000	119159.6
	Net present value	sum of present value of cash flow	137003
	year	net cash flow	present value of cash flow = cash flow/(1=r)^n r= 12%%
	0	-620000	-620000
	1	336000	300000
	2	284000	239158.2
	3	200000	170228.1
	4	137000	108183
	5	93000	61385.94
	Net present value	sum of present value of cash flow	258955
	2-	lower	earlier in time
		tracking technology