Reference no: EM133188997
Question 1 - Windhoek Mines, Limited, of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on land to which the company has mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would be associated with opening and operating a mine in the areas:
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Cost of new equipment and timbers
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$430,000
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Working capital required
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$145,000
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Annual net cash receipts
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$160,000
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Cost to construct new roads in three years
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$49,000
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Salvage value of equipment in four years
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$74,000
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*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.
The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company's required rate of return is 18%.
Required -
a. What is the net present value of the proposed mining project?
b. Should the project be accepted?
Question 2 - Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division's return on investment (ROI), which has been above 24% each of the last three years. Casey is considering a capital budgeting project that would require a $4,800,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 20%. The project would provide net operating income each year for five years as follows:
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Sales
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$4,500,000
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Variable expenses
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$2,040,000
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Contribution margin
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$2,460,000
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Fixed expenses:
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Advertising, salaries, and other fixed out-of-pocket costs
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$810,000
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Depreciation
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$960,000
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Total fixed expenses
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$1,770,000
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Net operating income
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$690,000
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Required -
1. What is the project's net present value?
2. What is the project's internal rate of return to the nearest whole percent?
3. What is the project's simple rate of return?
4-a. Would the company want Casey to pursue this investment opportunity?
4-b. Would Casey be inclined to pursue this investment opportunity?
Question 3 - Paul Swanson has an opportunity to acquire a franchise from The Yogurt Place, Incorporated, to dispense frozen yogurt products under The Yogurt Place name. Mr. Swanson has assembled the following information relating to the franchise:
1. A suitable location in a large shopping mall can be rented for $5,100 per month.
2. Remodeling and necessary equipment would cost $414,000. The equipment would have a 15-year life and a $27,600 salvage value. Straight-line depreciation would be used, and the salvage value would be considered in computing depreciation.
3. Based on similar outlets elsewhere, Mr. Swanson estimates that sales would total $540,000 per year. Ingredients would cost 20% of sales.
4. Operating costs would include $94,000 per year for salaries, $5,900 per year for insurance, and $51,000 per year for utilities. In addition, Mr. Swanson would have to pay a commission to The Yogurt Place, Incorporated, of 16.0% of sales.
Required -
1. Complete the contribution format income statement that shows the expected net operating income each year from the franchise outlet.
2-a. Compute the simple rate of return promised by the outlet.
2-b. If Mr. Swanson requires a simple rate of return of at least 19%, should he acquire the franchise?
3-a. Compute the payback period on the outlet.
3-b. If Mr. Swanson wants a payback of two years or less, will he acquire the franchise?
Question 4 - Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division's return on investment (ROI), which has exceeded 21% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
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Product A
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Product B
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Initial investment:
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Cost of equipment (0 salvage value)
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$210,000
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$420,000
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Annual revenues and costs:
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Sales revenues
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$290,000
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$390,000
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Variable expenses
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$138,000
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$186,000
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Depreciation expense
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$42,000
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$84,000
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Fixed out-of-pocket operating costs
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$74,000
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$54,000
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The company's discount rate is 19%.
Required -
1. Calculate the payback period for each product.
2. Calculate the net present value for each product.
3. Calculate the internal rate of return for each product.
4. Calculate the profitability index for each product.
5. Calculate the simple rate of return for each product.
6a. For each measure, identify whether Product A or Product B is preferred.
6b. Based on the simple rate of return, which of the two products should Lou's division accept?
Question 5 - Assume that a company is considering purchasing a machine for $50,000 that will have a five-year useful life and a $5,000 salvage value. The machine will lower operating costs by $17,250 per year. The company's required rate of return is 19%. The net present value of this investment is closest to?
Question 6 - Assume that a company is considering buying a new piece of equipment for $240,000 that would have a useful life of five years and no salvage value. The equipment would generate the following estimated annual revenues and expenses:
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Revenues
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$107,200
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Less operating expenses:
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Commissions
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$15,000
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Insurance
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$5,000
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Depreciation
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$48,000
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Maintenance
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$30,000
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$98,000
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Net operating income
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$9,200
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Required - The internal rate of return for this investment is closest to?
Question 7 - Assume the following information for a capital budgeting proposal with a five-year time horizon:
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Initial investment:
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Cost of equipment (0 salvage value)
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$400,000
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Annual revenues and costs:
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Sales revenues
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$300,000
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Variable expense
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$130,000
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Depreciation expense
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$50,000
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Fixed out-of-pocket costs
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$40,000
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Required - Assuming a discount rate of 12%, this proposal profitability index is closest to?
Question 8 - Assume the following information for a capital budgeting proposal with a five-year time horizon:
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Initial investment:
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Cost of equipment (0 salvage value)
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$510,000
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Annual revenues and costs:
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Sales revenues
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$300,000
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Variable expenses
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$130,000
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Depreciation expense
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$50,000
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Fixed out-of-pocket costs
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$40,000
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Required - The payback period for this investment is closest to?
Question 9 - Assume that a company is considering purchasing a new piece of equipment for $240,000 that would have a useful life of 10 years and no salvage value. The new equipment would cost $20,000 per year to operate and it would replace an old piece of equipment that costs $58,500 per year to operate. The old equipment currently being used could be sold for a salvage value of $40,000. The simple rate of return for the new equipment is closest to?
Question 10 - Ursus, Incorporated, is considering a project that would have a five-year life and would require a $2,400,000 investment in equipment. At the end of five years, the project would terminate, and the equipment would have no salvage value. The project would provide net operating income each year as follows (Ignore income taxes.):
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Sales
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$3,500,000
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Variable expenses
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$2,100,000
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Contribution margin
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$1,400,000
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Fixed expenses:
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Fixed out-of-pocket cash expenses
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$600,000
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Depreciation
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$480,000
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$1,080,000
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Net operating income
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$320,000
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All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 14%.
Required -
a. Compute the project's net present value.
b. Compute the project's internal rate of return.
c. Compute the project's payback period.
d. Compute the project's simple rate of return.