Answer and explain exercise 12-1 to 12-7

EXERCISE 12-1 Payback Method LO12-1 The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: Year Investment Cash Inflow 1 . .. . ... $15,000 $1,000 2. . . .... $8,000 $2,000 $2,500 $4,000 $5,000 $6,000 $5,000 8 .. $4,000 9....... $3,000 10... .. . . $2,000 Required: 1. Determine the payback period of the investment. 2. Would the payback period be affected if the cash inflow in the last year were several times as large? EXERCISE 12-2 Net Present Value Analysis LO12-2 The management of Kunkel Company is considering the purchase of a $27,000 machine that would reduce operating costs by $7,000 per year. At the end of the machine's five-year useful life, it will have zero salvage value. The company's required rate of return is 12%. Required: Determine the net present value of the investment in the machine. 2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? EXERCISE 12-3 Internal Rate of Return LO12-3 Wendell's Donut Shoppe is investigating the purchase of a new $18,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $3,800 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,000 dozen more donuts each year. The company realizes a contribution margin of $1.20 per dozen donuts sold. The new machine would have a six-year useful life. Required: 1. What would be the total annual cash inflows associated with the new machine for capital budgeting purposes? 2. What discount factor should be used to compute the new machine's internal rate of return? 3. Using Exhibit 12B-2 in Appendix 12B as a reference, what is the new machine's internal rate of return to the nearest whole percent? 4. In addition to the data given previously, assume that the machine will have a $9,125 salvage value at the end of six years. Under these conditions, what is the internal rate of return to the nearest whole percent? (Hint: You may find it helpful to use the net present value approach; find the discount rate that will cause the net present value to be closest to zero.) EXERCISE 12-4 Uncertain Future Cash Flows LO12-4 Lukow Products is investigating the purchase of a piece of automated equipment that will save $400,000 each year in direct labor and inventory carrying costs. This equipment costs $2,500,000 and is expected to have a 15-year useful life with no salvage value. The company's required rate of return is 20% on all equipment purchases. Management anticipates that this equipment will provide intangible benefits such as greater flexibility and higher-quality output that will result in additional future cash inflows. 594 Chapter 12 Required: 1. What is the net present value of the piece of equipment before considering its intangible benefits? 2. What minimum dollar value per year must be provided by the equipment's intangible benefits to justify the $2,500,000 investment? EXERCISE 12-5 Preference Ranking LO12-5 Information on four investment proposals is given below: Investment Proposal Investment required . . . . . . . . . . . . . . .. $(90,000) $(100,000) $(70,000) $(120,000) Present value of cash inflows .. 126,000 138,000 105,000 160,000 Net present value . . $ 36,000 $ 38,000 $ 35,000 $ 40.000 Life of the project . .. . .. . . . . . . . ..... 5 years 7 years 6 years 6 years Required: 1. Compute the project profitability index for each investment proposal. Rank the proposals in terms of preference. EXERCISE 12-6 Simple Rate of Return Method LO12-6 The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $120,000. The machine would replace an old piece of equipment that costs $30,000 per year to operate. The new machine would cost $12,000 per year to operate. The old machine currently in use could be sold now for a salvage value of $40,000. The new machine would have a useful life of 10 years with no salvage value. Required: What is the annual depreciation expense associated with the new bottling machine? 2. What is the annual incremental net operating income provided by the new bottling machine? 3 What is the amount of the initial investment associated with this project that should be used for calculating the simple rate of return? 4. What is the simple rate of return on the new bottling machine? EXERCISE 12-7 Net Present Value Analysis of Two Alternatives LO12-2 Perit Industries has $100,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Project A Project B Cost of equipment required .. $100,000 $0 Working capital investment required $0 $100,000 Annual cash inflows .. $21,000 $16,000 Salvage value of equipment in six years . $8,000 Life of the project 6 years 6 years The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries' discount rate is 14%. Required: Compute the net present value of Project A. 2. Compute the net present value of Project B. 3. Which investment alternative (if either) would you recommend that the company accept