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    Worksheet - Capital Appraisal

    Uploaded by

    rolandgraham29
    Financial Accounting

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    © All Rights Reserved
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    Worksheet - Capital Appraisal

    Uploaded by

    rolandgraham29
    18 views5 pages
    Financial Accounting

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    © © All Rights Reserved

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    PDF, TXT or read online from Scribd

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    Financial Accounting

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    18 views5 pages

    Worksheet - Capital Appraisal

    Uploaded by

    rolandgraham29
    Financial Accounting

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 5

    Work Sheet

    Question 1:

    Two machines-Machine M and Machine P-are being considered in a replacement


    decision. Both machines have about the same purchase price and an estimated ten-
    year life. The company uses a 12 percent minimum rate of return as its acceptance-
    rejection standard. Following are the estimated net cash inflows for each machine.

    Year Machine M Machine P


    1 12,000 17,500
    2 12,000 17,500
    3 14,000 17,500
    4 19,000 17,500
    5 20,000 17,500
    6 22,000 17,500
    7 23,000 17,500
    8 24,000 17,500
    9 25,000 17,500
    10 20,000 17,500
    Residual value 14,000 12,000

    1. Compute the present value of future cash flows for each machine. Use any
    present value table to ascertain the discount factors.

    2. Which machine should the company purchase, assuming that both involve
    the same capital investment?

    Question 2:

    Qen and Associates wants to buy an automated coffee roaster/grinder/brewer. This


    piece of equipment would have a useful life of six years, would cost $219,500, and
    would increase annual net cash inflows by $57,000. Assume there is no residual
    value at the end of six years. The company's minimum rate of return is 14 percent.
    Using the net present value method, prepare an analysis to determine whether the
    company should purchase the machine. Use any present value table to ascertain the
    discount factors.

    1
    Work Sheet

    Question 3:

    H and Y Service Station is planning to invest in automatic car wash equipment


    valued at $250,000. The owner estimates that the equipment will increase annual net
    cash inflows by $46,000. The equipment is expected to have a ten-year useful life
    with an estimated residual value of $50,000. The company requires a 14 percent
    minimum rate of return.
    Using the net present value method, prepare an analysis to determine whether the
    company should purchase the equipment. How important is the estimate of residual
    value to this decision? Use any present value table to ascertain the discount factors.

    Question 4:

    Assume the same facts for Hand Y Service Station as in E 9 except assume the Company
    requires a 20 percent minimum rate of return. Using the net present value method,
    prepare an analysis to determine whether the company should purchase the equipment.
    Use Tables 3 and 4 in the appendix on future value and present value tables.

    Use any present value table to ascertain the discount factors.

    Question 5:

    Perfection Sound, Inc., a manufacturer of stereo speakers, is thinking about adding a new
    plastic injection molding machine. This machine can produce speaker parts that the
    company now buys from outsiders. The machine has an estimated useful life of 14 years
    and will cost $425,000. Residual value of the new machine is $42,500. Gross cash
    revenue from the machine will be about $400,000 per year, and related cash expenses
    should total $310,050. Depreciation is estimated to be $30,350 annually. The payback
    period should be five years or less.

    Use the payback period method to determine whether the company should invest in the
    new machine. Show your computations to support your answer.

    2
    Work Sheet

    Question 6:

    Soaking Wet, Inc., a manufacturer of gears for lawn sprinklers, is thinking about adding a
    new fully automated machine. This machine can produce gears the company now
    produces on its third shift. The machine has an estimated useful life of 10 years and will
    cost $800,000. Residual value of the new machine is $80,000. Gross cash revenue from
    the machine will be about $520,000 per year, and related operating expenses, including
    depreciation, should total $500,000. Depreciation is estimated to be $80,000 annually.
    The payback period should be five years or less.

    Use the payback period method to determine whether the company should invest in the
    new machine. Show your computations to support your answer.

    Question 7:

    Assume the same facts as in question 5, above for Perfection Sound, Inc. Management
    has decided that only capital investments that yield at least a 20 percent return will be
    accepted.

    Using the accounting rate-of-return method, decide whether the company should invest in
    the machine. Show all computations to support your decision.

    Question 8:

    Assume the same facts as in question 6, above for Soaking Wet, Inc. Management has
    decided that only capital investments that yield at least a 5 percent return will be accepted.

    Using the accounting rate-of-return method, decide whether the company should invest in
    the machine. Show all computations to support your decision.

    3
    Work Sheet

    Question 9:

    Boink Corporation manufactures metal hard hats for on-site construction workers.
    Recently, management has tried to raise productivity to meet the growing demand from
    the real estate industry. The company is now thinking about buying a new stamping
    machine. Management has decided that only capital investments that yield at least a 14
    percent return will be accepted. The new machine would cost $325,000; revenue would
    increase by $98,400 per year; the residual value of the new machine would be $32,500;
    and operating cost increases (including depreciation) would be $74,600.

    Using the accounting rate-of-return method, decide whether the company should invest in
    the machine. Show all computations to support your decision

    Question 10:
    The Rolla Construction Company specializes in developing large shopping centres. The
    company is considering the purchase of a new earth-moving machine and has gathered
    the following information:

    Purchase Price $600,000


    Residual Value $100,000
    Desired payback period 3 years
    Minimum rate of return 15%

    The cash flow estimates are as follows:

    Year Cash Inflows Cash Outflows Net Cash Inflows Projected Net Income
    1 $500,000 $260,000 $240,000 $115,000
    2 450,000 240,000 210,000 85,000
    3 400,000 220,000 180,000 55,000
    4 350,000 200,000 150,000 25,000
    Totals 1,700,000 920,000 780,000 280,000

    Required:

    1. Analyze the Rolla Construction Company’s investment in the new earth-moving


    machine. In your analysis, use (a) the net present value method, (b) the
    accounting rate of return method, and (c) the payback period method.
    2. Determine the internal rate of return.
    3. Summarize your findings from 1 above, and recommend a course of action.

    4
    Work Sheet

    Question 11

    The Raab Company is expanding its production facilities to include a new product line, a
    sporty automotive tire rim. Tire rims can now be produced with little labour cost using
    new computerized machinery. The controller has advised management about two such
    machines. The details about each machine are as follows:

    XJS HZT
    Machine Machine
    Cost of machine $500,000 $550,000
    Residual Value 50,000 55,000
    Net income 34,965 40,670
    Annual net cash inflows 91,215 90,170

    The minimum rate of return is 12 percent. The maximum payback period is 6 years.
    (Where necessary, round calculations to the nearest dollar).

    Required:

    1. For each machine, compute the projected accounting rate of return


    2. compute the payback period for each machine
    3. Based on the information from 1 and 2 above, which machine should be
    purchased? Why?

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