| Present value index 4. Great Plains Transportation Inc. is considering acquiring equipment at a cost of $200,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $50,000. The company's minimum desired rate of return for net present value analysis is 10%. | Present Value of an Annuity of $1 at Compound Interest | | Year | 6% | 10% | 12% | 15% | 20% | | 1 | 0.943 | 0.909 | 0.893 | 0.870 | 0.833 | | 2 | 1.833 | 1.736 | 1.690 | 1.626 | 1.528 | | 3 | 2.673 | 2.487 | 2.402 | 2.283 | 2.106 | | 4 | 3.465 | 3.170 | 3.037 | 2.855 | 2.589 | | 5 | 4.212 | 3.791 | 3.605 | 3.352 | 2.991 | | 6 | 4.917 | 4.355 | 4.111 | 3.784 | 3.326 | | 7 | 5.582 | 4.868 | 4.564 | 4.160 | 3.605 | | 8 | 6.210 | 5.335 | 4.968 | 4.487 | 3.837 | | 9 | 6.802 | 5.759 | 5.328 | 4.772 | 4.031 | | 10 | 7.360 | 6.145 | 5.650 | 5.019 | 4.192 | Compute the following: a. The average rate of return, giving effect to straight-line depreciation on the investment. If required, round your answer to one decimal place. % b. The cash payback period. Select2345678Item 2 years c. The net present value. Use the above table of the present value of an annuity of $1. Round to the nearest dollar. If required, use a minus sign to indicate negative net present value" for current grading purpose. | Present value of annual net cash flows | $ | | Less amount to be invested | $ | | Net present value | $ | 5. Cousin's Salted Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $56,129.85 and could be used to deliver an additional 50,000 bags of pretzels per year. Each bag of pretzels can be sold for a contribution margin of $0.58. The delivery truck operating expenses, excluding depreciation, are $0.79 per mile for 17,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $41,865.00. The new machine would require three fewer hours of direct labor per day. Direct labor is $10 per hour. There are 250 operating days in the year. Both the truck and the bagging machine are estimated to have seven-year lives. The minimum rate of return is 19%. However, Cousin's has funds to invest in only one of the projects. | Present Value of an Annuity of $1 at Compound Interest | | Year | 6% | 10% | 12% | 15% | 20% | | 1 | 0.943 | 0.909 | 0.893 | 0.870 | 0.833 | | 2 | 1.833 | 1.736 | 1.690 | 1.626 | 1.528 | | 3 | 2.673 | 2.487 | 2.402 | 2.283 | 2.106 | | 4 | 3.465 | 3.170 | 3.037 | 2.855 | 2.589 | | 5 | 4.212 | 3.791 | 3.605 | 3.352 | 2.991 | | 6 | 4.917 | 4.355 | 4.111 | 3.784 | 3.326 | | 7 | 5.582 | 4.868 | 4.564 | 4.160 | 3.605 | | 8 | 6.210 | 5.335 | 4.968 | 4.487 | 3.837 | | 9 | 6.802 | 5.759 | 5.328 | 4.772 | 4.031 | | 10 | 7.360 | 6.145 | 5.650 | 5.019 | 4.192 | a. Compute the internal rate of return for each investment. Use the above table of present value of an annuity of $1. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest percent. | | Delivery Truck | Bagging Machine | | Present value factor | | | | Internal rate of return 6. Al a Mode, Inc., is considering one of two investment options. Option 1 is a $41,000 investment in new blending equipment that is expected to produce equal annual cash flows of $13,000 for each of seven years. Option 2 is a $49,000 investment in a new computer system that is expected to produce equal annual cash flows of $17,000 for each of five years. The residual value of the blending equipment at the end of the fifth year is estimated to be $9,000. The computer system has no expected residual value at the end of the fifth year. | Present Value of $1 at Compound Interest | | Year | 6% | 10% | 12% | 15% | 20% | | 1 | 0.943 | 0.909 | 0.893 | 0.870 | 0.833 | | 2 | 0.890 | 0.826 | 0.797 | 0.756 | 0.694 | | 3 | 0.840 | 0.751 | 0.712 | 0.658 | 0.579 | | 4 | 0.792 | 0.683 | 0.636 | 0.572 | 0.482 | | 5 | 0.747 | 0.621 | 0.567 | 0.497 | 0.402 | | 6 | 0.705 | 0.564 | 0.507 | 0.432 | 0.335 | | 7 | 0.665 | 0.513 | 0.452 | 0.376 | 0.279 | | 8 | 0.627 | 0.467 | 0.404 | 0.327 | 0.233 | | 9 | 0.592 | 0.424 | 0.361 | 0.284 | 0.194 | | 10 | 0.558 | 0.386 | 0.322 | 0.247 | 0.162 | | Present Value of an Annuity of $1 at Compound Interest | | Year | 6% | 10% | 12% | 15% | 20% | | 1 | 0.943 | 0.909 | 0.893 | 0.870 | 0.833 | | 2 | 1.833 | 1.736 | 1.690 | 1.626 | 1.528 | | 3 | 2.673 | 2.487 | 2.402 | 2.283 | 2.106 | | 4 | 3.465 | 3.170 | 3.037 | 2.855 | 2.589 | | 5 | 4.212 | 3.791 | 3.605 | 3.352 | 2.991 | | 6 | 4.917 | 4.355 | 4.111 | 3.784 | 3.326 | | 7 | 5.582 | 4.868 | 4.564 | 4.160 | 3.605 | | 8 | 6.210 | 5.335 | 4.968 | 4.487 | 3.837 | | 9 | 6.802 | 5.759 | 5.328 | 4.772 | 4.031 | | 10 | 7.360 | 6.145 | 5.650 | 5.019 | 4.192 | Assume there is sufficient capital to fund only one of the projects. Determine which project should be selected, comparing the (a) net present values and (b) present value indices of the two projects, assuming a minimum rate of return of 10%. Use the present value tables appearing above. a. Determine the net present values of the two projects. | | Blending Equipment | Computer System | | Total present value of cash flows | $ | $ | | Less amount to be invested | $ | $ | | Net present value | $ | $ | b. Determine the present value indices of the two projects. If required, round the present value index to two decimal places. | | Present Value Index | | Blending Equipment | | | Computer System 7. The investment committee of Shield Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each requires an investment of $513,000. The estimated net cash flows from each project are as follows: | | Net Cash Flow | | Year | Office Expansion | Server Upgrade | | 1 | $143,000 | | | | $189,000 | | | | | 2 | 143,000 | | | | 189,000 | | | | | 3 | 143,000 | | | | 189,000 | | | | | 4 | 143,000 | | | | 189,000 | | | | | 5 | 143,000 | | | | | | | | | 6 | 143,000 | | | | | | | | The committee has selected a rate of 15% for purposes of net present value analysis. It also estimates that the residual value at the end of each project's useful life is $0, but at the end of the fourth year, the office expansion's residual value would be $179,000. | Present Value of $1 at Compound Interest | | Year | 6% | 10% | 12% | 15% | 20% | | 1 | 0.943 | 0.909 | 0.893 | 0.870 | 0.833 | | 2 | 0.890 | 0.826 | 0.797 | 0.756 | 0.694 | | 3 | 0.840 | 0.751 | 0.712 | 0.658 | 0.579 | | 4 | 0.792 | 0.683 | 0.636 | 0.572 | 0.482 | | 5 | 0.747 | 0.621 | 0.567 | 0.497 | 0.402 | | 6 | 0.705 | 0.564 | 0.507 | 0.432 | 0.335 | | 7 | 0.665 | 0.513 | 0.452 | 0.376 | 0.279 | | 8 | 0.627 | 0.467 | 0.404 | 0.327 | 0.233 | | 9 | 0.592 | 0.424 | 0.361 | 0.284 | 0.194 | | 10 | 0.558 | 0.386 | 0.322 | 0.247 | 0.162 | | Present Value of an Annuity of $1 at Compound Interest | | Year | 6% | 10% | 12% | 15% | 20% | | 1 | 0.943 | 0.909 | 0.893 | 0.870 | 0.833 | | 2 | 1.833 | 1.736 | 1.690 | 1.626 | 1.528 | | 3 | 2.673 | 2.487 | 2.402 | 2.283 | 2.106 | | 4 | 3.465 | 3.170 | 3.037 | 2.855 | 2.589 | | 5 | 4.212 | 3.791 | 3.605 | 3.352 | 2.991 | | 6 | 4.917 | 4.355 | 4.111 | 3.784 | 3.326 | | 7 | 5.582 | 4.868 | 4.564 | 4.160 | 3.605 | | 8 | 6.210 | 5.335 | 4.968 | 4.487 | 3.837 | | 9 | 6.802 | 5.759 | 5.328 | 4.772 | 4.031 | | 10 | 7.360 | 6.145 | 5.650 | 5.019 | 4.192 | Required: If required, use the minus sign to indicate a negative net present value. 1. For each project, compute the net present value. Use the present value of an annuity of $1 table above. Ignore the unequal lives of the projects. If required, round to the nearest dollar. | | Office Expansion | Server Upgrade | | Present value of annual net cash flows | $ | $ | | Less amount to be invested | $ | $ | | Net present value | $ | $ | 2. For each project, compute the net present value, assuming that the office expansion is adjusted to a four-year life for purposes of analysis. Use the present value of $1 table above. | | Office Expansion | Server Upgrade | | Present value of net cash flow total | $ | $ | | Less amount to be invested | $ | $ | | Net present value | $ | $ | | | | | | | | |
