1. Darth Company is considering the purchase of new heavy construction equipment that will cost $2,000,000 and...
Question:
1. Darth Company is considering the purchase of new heavy construction equipment that will cost $2,000,000 and have a life of 8 years with no expected salvage value. The expected cash flows associated with the project are as follows:
Year Cash Revenues Cash Expenses & Depreciation
1 $2,400,000 $1,900,000
2 $2,400,000 $1,900,000
3 $2,400,000 $1,900,000
4 $2,400,000 $1,900,000
5 $2,400,000 $1,900,000
6 $2,400,000 $1,900,000
7 $2,400,000 $1,900,000
8 $2,400,000 $1,900,000
What is the average annual income for this project?
a. $2,400,000
b. $1,900,000
c. $500,000
d. $62,500
e. $300,000
2.
What is the accounting rate of return for the project?
a. 25%
b. 3.125%
c. 400%
d. 83.33%
e. 120%
Present value of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 0.925 0.890 0.857 0.826 0.797 0.769
3 0.889 0.840 0.794 0.751 0.712 0.675
4 0.855 0.792 0.735 0.683 0.636 0.592
5 0.822 0.747 0.681 0.621 0.567 0.519
6 0.790 0.705 0.630 0.564 0.507 0.456
7 0.760 0.665 0.583 0.513 0.452 0.400
8 0.731 0.627 0.540 0.467 0.404 0.351
9 0.703 0.592 0.500 0.424 0.361 0.308
10 0.676 0.558 0.463 0.386 0.322 0.270
Present value of an Annuity of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 1.886 1.833 1.783 1.736 1.690 1.647
3 2.775 2.673 2.577 2.487 2.402 2.322
4 3.630 3.465 3.312 3.170 3.037 2.914
5 4.452 4.212 3.993 3.791 3.605 3.433
6 5.242 4.917 4.623 4.355 4.111 3.889
7 6.002 5.582 5.206 4.868 4.564 4.288
8 6.733 6.210 5.747 5.335 4.968 4.639
9 7.435 6.802 6.247 5.759 5.328 4.946
10 8.111 7.360 6.710 6.145 5.650 5.216
3. Morgan Clinical Practice is considering an investment in new imaging equipment that will cost $400,000. The equipment is expected to yield cash inflows of $80,000 per year for a six year period. Morgan set a required rate of return at 10%. What is the net present value of the investment? ( Note: there may be rounding error depending on the table you use to compute your answer. Choose the answer closest to the one you calculate.)
a. $51,600
b. ($51,600)
c. $348,400
d. ($348,600)
e. $451,600
4.
Elizabeth Myers invested in a project that required an initial amount of $1,560, and returned one cash inflow of $12,000 at the end of the 18th year. A partial table of the present value of an annuity of $1 in arrears is as follows:
Year 2% 4% 6% 8% 10% 12% 14% 16%
18 0.700 0.494 0.350 0.250 0.180 0.130 0.095 0.069
What is the internal rate of return for this investment?
a. 8%
b. 10%
c. 12%
d. 14%
e. 16%
5.
The best person/group in a firm to perform a post audit of a capital investment is usually:
a. the manager of that investment.
b. the CEO.
c. the board of directors.
d. the internal audit staff.
e. an external auditor.
Operations Management
ISBN: 978-0132687584
1st Canadian Edition
Authors: Jay Heizer, Barry Render, Paul Griffin