Question

16sb Please show full calculation, TIA!
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5
ABC Company estimated that it can generate $42,000 per year in additional cash inflows for the next five years if it automates some of its production equipment at an investment cost of $150,000.
ABC's discount rate is 10 percent.
Present value factors: Present value of $1 for 5 years @ 10 percent = 0.6209.
Present value of an annuity of $1 for 5 years @ 10 percent = 3.7908.

Calculate the following:
i.Present value of additional cash inflows = (Round your answer to two decimal places.)
ii.Net present value of investment = (Round your answer to two decimal places.)
iii. Investment decision = YES or NO

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6
ABC Company has calculated the net present value of two investment opportunities but must decide which option to pursue:

Project X: Present value of cash flows = $117,000 Investment = $100,000 Net present value = $17,000
Project Z: Present value of cash flows = $138,000 Investment = $120,000 Net present value = $18,000

Complete the following:
i.Present value ratio of Project X =
ii.Present value ratio of Project Z =
iii.Decision = Invest in ….

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7
ABC Company is using net present value analysis at various discount rates in order to determine the internal rate of return of an investment proposal.

NPV using a discount rate of 12 percent = $2,095 NPV using a discount rate of 14 percent = $(2,108)

By interpolating these results, an approximate internal rate of return on the investment is estimated to be percent. (Round your answer to the nearest whole percentage.)

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8
ABC Company is considering investing in new production equipment at a cost of $60,000 with a 10-year useful life and no salvage value.

The following are estimated for Year 1 of the project:
Sales = $100,000                  Production costs = $82,600              Depreciation expense = $6,000

Calculate the following for ABC Company for Year 1:
i. Operating income =
ii. Average investment =
iii. Accounting rate of return =

Answer 1

Solution

(5)
i. Present Value of Additional Cash Inflows
= Additional Cash Inflows X Present value of an annuity of $1 for 5 years @ 10 percent
= $ 42,000 X 3.7908
= $ 159,213.60
ii. Net Present Value of Investment
= Present Value of Additional Cash Inflows - Investment cost
= $ (159,213.60 - 150,000)
= $ 9,213.60
iii. Investment Decision = YES

(6)
Present Value Ratio = (Present value of cash flows / Investment)
i. Present value ratio of Project X
= (117,000 / 100,000)
= 1.17
ii. Present value ratio of Project Z
= (138,000 / 120,000)
= 1.15
iii. Decision = Invest in Project X

(7)
At 12%, NPV = $ 2,095
At 14%, NPV = $ (2,108)
As we know that at IRR, Present Value of Future Cash Flows = Initial Invetment, i.e. NPV will become 0
Therefore, assume at X% (IRR), NPV = $ 0

So, using interpolation we get,

(X - 12) / (14 - 12) = (0 - 2,095) / (- 2,108 - 2,095)
Or, (X - 12) / 2 = 2095 / 4203
Or, (X - 12) / 2 = 0.4985 (Approx.)
Or, X - 12 = 0.997
Or, X = 12.997

Therefore, Internal Rate of Return (IRR) will be 12.997%, or 13.00% (Approx.)

(8)
i. Operating Income
= Sales - Production Cost - Depreciation Expense
= $ (100,000 - 82,600 - 6,000)
= $ 11,400
ii. Average Investment
= (Initial Equipment Cost + Residual Value) / 2
= $ (60,000 + 0) / 2
= $ 30,000
iii. Accounting Rate of Return
= (Operating Income / Average Investment) X 100
= (11400 / 30000) X 100
= 38.00%