FINANCE

Exercise 25-1 Payback period computation; uneven cash flows LO P1

Beyer Company is considering the purchase of an asset for $360,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year.

 

  Year 1 Year 2 Year 3 Year 4 Year 5 Total
  Net cash flows   $ 80,000     $ 50,000     $ 70,000     $ 250,000     $ 13,000     $ 463,000  

 

 

Compute the payback period for this investment. (Cumulative net cash outflows must be entered with a minus sign. Round your answers to 2 decimal places.)

 

A machine can be purchased for $210,000 and used for 5 years, yielding the following net incomes. In projecting net incomes, double-declining balance depreciation is applied, using a 5-year life and a zero salvage value.

 

  Year 1 Year 2 Year 3 Year 4 Year 5
  Net incomes   $ 13,000     $ 28,000     $ 53,000     $ 40,500     $ 103,000  

 

 

Compute the machine’s payback period (ignore taxes). (Round your intermediate calculations to 3 decimal places and payback period answer to 3 decimal places.)

 

Exercise 25-3 Payback period computation; even cash flows LO P1

Compute the payback period for each of these two separate investments:

 

 

a. A new operating system for an existing machine is expected to cost $240,000 and have a useful life of four years. The system yields an incremental after-tax income of $69,230 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $9,000.
b. A machine costs $180,000, has a $13,000 salvage value, is expected to last seven years, and will generate an after-tax income of $38,000 per year after straight-line depreciation.

 

Exercise 25-4 Accounting rate of return LO P2

 

A machine costs $300,000 and is expected to yield an after-tax net income of $9,000 each year. Management predicts this machine has a 9-year service life and a $60,000 salvage value, and it uses straight-line depreciation. Compute this machine’s accounting rate of return. (Round your answer to 2 decimal places.)

 

Exercise 25-5 Payback period and accounting rate of return on investment LO P1, P2

B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $480,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 192,000 units of the equipment’s product each year. The expected annual income related to this equipment follows.

 

 

       
  Sales $ 300,000  
  Costs      
    Materials, labor, and overhead (except depreciation)   160,000  
    Depreciation on new equipment   40,000  
    Selling and administrative expenses   30,000  
 


 
  Total costs and expenses   230,000  
 


 
  Pretax income   70,000  
  Income taxes (30%)   21,000  
 


 
  Net income $ 49,000  
 




 

Exercise 25-6 Computing net present value LO P3

B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $368,000 with a 4-year life and no salvage value. It will be depreciated on a straight-line basis. K2B Co. concludes that it must earn at least a 8% return on this investment. The company expects to sell 147,200 units of the equipment’s product each year. The expected annual income related to this equipment follows. (PV of $1FV of $1PVA of $1, and FVA of $1(Use appropriate factor(s) from the tables provided.)

 

       
  Sales $ 230,000  
  Costs      
     Materials, labor, and overhead (except depreciation)   81,000  
     Depreciation on new equipment   92,000  
     Selling and administrative expenses   23,000  
 


 
  Total costs and expenses   196,000  
 


 
  Pretax income   34,000  
  Income taxes (30%)   10,200  
 


 
  Net income $ 23,800  
 




 

 

 

Compute the net present value of this investment. (Round “PV Factor” to 4 decimal places. Round your intermediate calculations and final answer to the nearest dollar amount.)

 

 

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