Question

1)Swift Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $132,000 and will increase annual expenses by $81,000 including depreciation. The oil well will cost $474,000 and will have a $11,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return. (Round answer to 2 decimal places, e.g. 12.47.)

2)Caine Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $187,663 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $33,000. Management also believes that the new bottling machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. Assume a discount rate of 10%. Click here to view PV table.

-Net present value $ ___

-How much would the reduction in downtime have to be worth in order for the project to be acceptable? (Round answer to 0 decimal places, e.g. 125.)

3)McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $506,194, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $69,900. Project B will cost $314,010, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $45,200. A discount rate of 7% is appropriate for both projects. Click here to view PV table.

Net present value - Project A $ __

Profitability Index - Project A $ ___

Net present value - Project B $ __

Profitability Index - Project B $ __

4)

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 $245,788. 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		$389,300
	2		399,900
	3		410,000
	4		425,500
	5		432,400
	6		434,500
	7		438,000

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 $379,400. This new equipment would require maintenance costs of $98,800 at the end of the fifth year. The cost of capital is 9%.

Net present value $ ___

5) Bruno Corporation is involved in the business of injection molding of plastics. It is considering the purchase of a new computer-aided design and manufacturing machine for $437,200. The company believes that with this new machine it will improve productivity and increase quality, resulting in an increase in net annual cash flows of $106,338 for the next 6 years. Management requires a 10% rate of return on all new investments.

Internal rate of return ___%

Answer 1

(there are five questions in this post. Only one question is allowed in single post. So the first question is being solved below)

1) Annual rate of return (IRR) is the interest rate at which Net Present Value (NPV) of the project is zero. So we equate the NPV to zero using Goal seek function in Excel to determine the IRR. The spreadsheet model is following

Formulas:

F2 =SUM(B2:E2)   copy to F2:F12

G2 =F2/(1+$G$17)^A2 copy to G2:G12

G14 =SUM(G2:G12)

Annual rate of return (IRR) = 1.73 %