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    Wiley Chapter 9 HW

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    Ari Leibowitz
    The document provides guidance and solutions for exercises in Chapter 9 on capital budgeting techniques. Exercise 9-2 asks to identify cash flows related to a new packaging machine. The summary lists outflows for the purchase, installation, and salvage of the old machine, and inflows for salvage of the new machine and variable cost savings over 10 years. Exercise 9-9 asks to calculate the annual cash savings needed for a lawnmower purchase to be acceptable based on net present value. Part a finds the savings must be $2,500 and part b finds $2,662 if the required rate of return is higher. Exercise 9.16 calculates the payback period for equipment as between 3-

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    Wiley Chapter 9 HW

    Uploaded by

    Ari Leibowitz
    115 views4 pages
    The document provides guidance and solutions for exercises in Chapter 9 on capital budgeting techniques. Exercise 9-2 asks to identify cash flows related to a new packaging machine. The summary lists outflows for the purchase, installation, and salvage of the old machine, and inflows for salvage of the new machine and variable cost savings over 10 years. Exercise 9-9 asks to calculate the annual cash savings needed for a lawnmower purchase to be acceptable based on net present value. Part a finds the savings must be $2,500 and part b finds $2,662 if the required rate of return is higher. Exercise 9.16 calculates the payback period for equipment as between 3-

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    Wiley Chapter 9 HW

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    The document provides guidance and solutions for exercises in Chapter 9 on capital budgeting techniques. Exercise 9-2 asks to identify cash flows related to a new packaging machine. The summary lists outflows for the purchase, installation, and salvage of the old machine, and inflows for salvage of the new machine and variable cost savings over 10 years. Exercise 9-9 asks to calculate the annual cash savings needed for a lawnmower purchase to be acceptable based on net present value. Part a finds the savings must be $2,500 and part b finds $2,662 if the required rate of return is higher. Exercise 9.16 calculates the payback period for equipment as between 3-

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    115 views4 pages

    Wiley Chapter 9 HW

    Uploaded by

    Ari Leibowitz
    The document provides guidance and solutions for exercises in Chapter 9 on capital budgeting techniques. Exercise 9-2 asks to identify cash flows related to a new packaging machine. The summary lists outflows for the purchase, installation, and salvage of the old machine, and inflows for salvage of the new machine and variable cost savings over 10 years. Exercise 9-9 asks to calculate the annual cash savings needed for a lawnmower purchase to be acceptable based on net present value. Part a finds the savings must be $2,500 and part b finds $2,662 if the required rate of return is higher. Exercise 9.16 calculates the payback period for equipment as between 3-

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    of 4

    CHAPTER NINE HOMEWORK HINTS:

    Exercise 9-2
    9-2.
    Identifying cash flows
    (LO 1) Mighty Vita produces a wide range of herbal supplements sold nationwide through
    independent distributors. In response to an increasing demand for its products, the company is
    considering the purchase of a new packaging machine to replace the seven-year-old machine
    currently in use. The new machine will cost $160,000, and installation will require an additional
    $15,000. The machine has a useful life of 10 years and is expected to have a salvage value of
    $8,000 at that time. The variable cost to operate the new machine is $10 per carton compared to
    the current machine's variable cost of $10.10 per carton, and Mighty Vita expects to pack
    250,000 cartons each year. If the new machine is purchased, Mighty Vita will avoid a required
    $10,000 overhaul of the current machine in four years. The current machine has a market value
    of $14,000.
    Required
    Identify the amount and timing of all cash flows related to the acquisition of the new packaging
    machine.
    Exercise 9.2 Solution:
    Cash Flow Timing Amount
    Purchase price Year 0 ($160,000)
    Installation Year 0 (15,000)
    Salvage of old equipment Year 0 14,000
    Salvage of new equipment Year 10 8,000
    Variable cost savings (250,000 × .1) Years 1-10 25,000
    Avoided overhaul 4 10,000

    Exercise 9-9
    Net present value
    (LO 3) Larry's Lawn Service needs to purchase a new lawnmower costing $7,756 to replace an
    old lawnmower that cannot be repaired. The new lawnmower is expected to have a useful life of
    four years, with no salvage value at the end of that period.
    Required
    (a)
    If Larry's required rate of return is 11%, what level of annual cash savings must the lawnmower
    generate to be considered an acceptable investment under the net present value method?
    (b)
    If Larry's required rate of return is 14%, what level of annual cash savings must the lawnmower
    generate to be considered an acceptable investment under the net present value method?

    1
    Exercise 9.9 Solution:

    a. For the lawnmower to be acceptable using the net present value method, the net present
    value must be greater than or equal to zero. Let x equal the present value of the annual
    cash savings:

    (x × PVA4, 11%) - $7,756= $0


    x × 3.1024 = $7,756
    x = $2,500

    b.
    (x × PVA4, 14%) - $7,756= $0
    x × 2.9137 = $7,756
    x = $2,662

    Exercise 9-12 Davis Video in problem


    Internal rate of return (IRR) = net initial investment
    Annual savings

    = 413,515 – 5,304
    40,400 + 25,500

    = 408,211
    65,900

    = 6.1944 (PVA factor) expected to last 12 yr


    Should accept because the NPV is higher than the hurdle rate

    Exercise 9.16
    Payback period with uneven cash flows
    (LO 5) The Seago Company is planning to purchase $500,000 of equipment with an estimated
    seven-year life and no estimated salvage value. The company has projected the following annual
    cash flows for the investment.
    Year Projected Cash Flows
    1 $200,000
    2 150,000
    3 100,000
    4 60,000
    5 60,000
    6 40,000
    7 40,000

    2
    Year Projected Cash Flows
    Total $650,000
    Required
    (a)
    Calculate the payback period for the proposed equipment purchase. Assume that all cash flows
    occur evenly throughout the year.
    (b)
    If Seago requires a payback period of three years or less, should the company make this
    investment?

    Exercise 9.16 solution:


    a.
    Year Annual Cash Flows Cumulative Cash Flows
    1 $200,000 $200,000
    2 150,000 350,000
    3 100,000 450,000 $500,000
    4 60,000 510,000
    5 60,000 570,000 payback
    6 40,000 610,000
    7 40,000 650,000
    Total $650,000

    The payback period is between years 3 & 4. At the end of year 3, $50,000 ($500,000 -
    $450,000) more cash is needed for the investment to be paid back completely. In year
    $50,000
    4, $6,000 is received evenly throughout the year, so it will take 10 months ( ×
    $60,000
    12) to recoup the remaining $50,000. Therefore, the payback period is 3 years and 10
    months.

    b. Seago should not accept this project based on payback period, since the payback period
    of 3 years and 10 months is greater than the required 3 year payback period.

    Exercise 9.18 Davis Video in problem


    a) Accounting rate of return = operating income
    Net investment

    = 33,100 – 840 – (102,800 / 4 yr) = 6,560


    b) 6,560 / 102,800 = .0638

    3
    c) Increase

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