## Question

# Q1. Average Rate of Return The following data are accumulated by Lone Peak Inc. in evaluating two competing capital investment proposals. 3D Printer Truck Amount

Q1. Average Rate of Return

The following data are accumulated by Lone Peak Inc. in evaluating two competing capital investment proposals.

3D Printer | Truck | ||||

Amount of investment | $68,000 | $92,000 | |||

Useful life | 4 years | 9 years | |||

Estimated residual value | 0 | 0 | |||

Estimated total income over the useful life | $8,160 | $37,260 |

Determine the expected average rate of return for each proposal. **If required, round your answers to one decimal place.**

3D Printer | fill in the blank 1 % |

Truck | fill in the blank 2 % |

Q2. Average Rate of ReturnCost Savings

Northwest Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $134,000 with a $12,000 residual value and a five-year life. The equipment will replace one employee who has an average wage of $47,550 per year. In addition, the equipment will have operating and energy costs of $12,930 per year.

Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment. **If required, round to the nearest whole percent.** fill in the blank 1 %

Q3. Average Rate of ReturnNew Product

Micro Tek Inc. is considering an investment in new equipment that will be used to manufacture a smartphone. The phone is expected to generate additional annual sales of 5,500 units at $185 per unit. The equipment has a cost of $460,400, residual value of $34,600, and an 8-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows:

Cost per unit: | |||

Direct labor | $31.00 | ||

Direct materials | 119.00 | ||

Factory overhead (including depreciation) | 20.60 | ||

Total cost per unit | $170.60 |

Determine the average rate of return on the equipment. **If required, round to the nearest whole percent.** fill in the blank 1 %

Q4. Determine Cash Flows

Marigold Inc. is planning to invest in new manufacturing equipment to make a new garden tool. The garden tool is expected to generate additional annual sales of 9,700 units at $54 each. The new manufacturing equipment will cost $220,600 and is expected to have a 10-year life and $16,900 residual value. Selling expenses related to the new product are expected to be 5% of sales revenue. The cost to manufacture the product includes the following on a per-unit basis:

Direct labor | $9.20 | |

Direct materials | 30.00 | |

Fixed factory overhead-depreciation | 2.10 | |

Variable factory overhead | 4.60 | |

Total | $45.90 |

Determine the net cash flows for the first year of the project, Years 2-9, and for the last year of the project. Use a minus sign to indicate cash outflows. **Do not round your intermediate calculations but, if required, round your final answer to the nearest dollar.**

Year 1 | Years 2-9 | Last Year | |

Initial investment | $fill in the blank 1 | ||

Operating cash flows: | |||

Annual revenues | $fill in the blank 2 | $fill in the blank 3 | $fill in the blank 4 |

Selling expenses | fill in the blank 5 | fill in the blank 6 | fill in the blank 7 |

Cost to manufacture | fill in the blank 8 | fill in the blank 9 | fill in the blank 10 |

Net operating cash flows | $fill in the blank 11 | $fill in the blank 12 | $fill in the blank 13 |

Total for Year 1 | $fill in the blank 14 | ||

Total for Years 2-9 | $fill in the blank 15 | ||

Residual value | fill in the blank 16 | ||

Total for last year | $fill in the blank 17 |

Q5. Sustainable energy capital investment analysis

Central Plains Power Company is considering an investment in wind farm technology to replace natural gas-generating capacity. Initial installation cost of a wind turbine is expected to be $1,200 per kilowatt-hour of capacity. The wind turbine has a capacity of generating 2 megawatts per hour. A kilowatt-hour is 1,000 watts generated per hour, and a megawatt hour is 1,000 kilowatts generated per hour.

Annual operating information related to the wind turbine project was developed as follows:

Operating cost per wind turbine megawatt hour | $10 |

Variable operating, fuel, and maintenance costs of natural gas per megawatt hour | $95 |

Wind turbine operating days per year | 90 |

**a.** Determine the initial investment cost of the wind turbine.

fill in the blank 1

**b.** Determine the annual cost savings from the wind turbine in replacing natural gas generation. **Round to the nearest dollar.**

fill in the blank 2

**c.** Determine the net present value of the project assuming a 15-year life and 12% minimum rate of return (Hint: Present value of a $1 annuity at 12% for 15 periods is 6.81086). **Round to the nearest dollar.**

fill in the blank 3

Q6. Sustainable product capital investment analysis

AutoSource Inc. designs and manufactures tires for automobiles. The company's strategy is to design products that incorporate the full environmental impact of the product over its life cycle. This includes designing tires for fuel efficiency.

The technical team has determined that the tires manufactured with a silica blend will reduce road resistance. Thus, silica-blended tires will be significantly more fuel-efficient for the consumer, without compromising tire life. To produce the silica-blended tires, AutoSource will need to invest $5,000,000 in new equipment. It is expected that the new tire will be attractive to consumers and will result in increased tire sales. However, sales of conventional tires will be reduced as a result of the new silica-based tires. To evaluate the project, the cost and prices of silica and conventional tires are estimated as follows:

Silica Tires | Conventional Tires | |

Sales price per tire | $160 | $140 |

Material cost per tire | 80 | 70 |

Variable manufacturing cost per tire | 15 | 12 |

It is anticipated that 80,000 silica tires will be sold annually, while the sales of conventional tires will be reduced by 70,000 tires annually.

**a.** Determine the annual contribution margin for manufacturing and selling the silicablended tires.

fill in the blank 1

**b.** Determine the annual cash flows of manufacturing and selling silica-blended tires, incorporating the impact of lost sales from conventional tires.

fill in the blank 2

**c.** Prepare a net present value analysis of the silica equipment investment, assuming an 8-year life and 12% minimum rate of return (Hint: Present value of a $1 annuity at 12% for 8 periods is 4.96764). **Round to the nearest dollar.**

Present value of annual savings | $fill in the blank 3 |

Less amount to be invested | fill in the blank 4 |

Net present value | $fill in the blank 5 |

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