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Use the following information to answer questions 13 through 24. Choose the correct answer from the list of possible answers found on page 7. Write the letter which corresponds to the correct answer. Pretty Puppies, Inc. is evaluating whether to purchase a new dog treat machine. Help Arabella Narcissus, the finance manager, determine the following information about the new machine, given the following information.

If purchased

o The new machine will cost $17,000.

o The new machine would result in $1,000 of maintenance costs each year.

o The company would depreciate the machine straight-line for 5 years and the machine is expected to have a $2,000 salvage value.

The company also has the option to lease the machine for $4,000 per year and would have no ownership rights in the machine at the end of the lease period. The company would not incur separate maintenance costs, these are included in the lease payments.

Annual cash revenues are expected to be $6,500 for the first year and then grow by 10% each year for 5 years.

The life of the machine would be 5 years.

The companys tax rate is expected to be 40% for the forseeable future.

The company prefers to have a payback period of 3.5 years.

The company has the ability to borrow at 5% and uses this rate for all calculations.

Present Value Table

Periods PV of $1 at 5%

1. 0.95238

2 0,90703

3 0.86384

4 0.82270

5 0.78353

Periods PV of ordinary annuity of $1 at 5%

1 0.95238

2 1.85941

3 2.72325

4. 3.54595

5 4.32948

Enter the appropriate amounts in the associated cells. Indicate negative numbers by using a leading minus (-) sign. Round payback periods and accounting rate of return to the nearest hundredth. Round NPV to the nearest whole dollar. Round interim calculations to the nearest hundredth. Then select from the option list provided the most accurate evaluation method.

Test 2 Spring 2021 ACCT 312 Page 6 of 8

Subsection 1: If the company purchases the machine.

__________13) What is the traditional (nondiscounted) payback period in years?

__________14) Using the undiscounted payback period, should the company buy a new treat machine?

__________15) What is the discounted payback period (in years)?

__________16) Using the discounted payback period, does the investment meet the companys investment criteria?

__________17) What is the net present value of the cash flows if the company purchases the machine?

__________18) Using the net present value method, does the investment meet the companys investment criteria?

__________19) What is the profitability index?

__________20) What is the internal rate of return?

__________21) What is the annual tax shield of related expenses?

Subsection 2: If the company leases the machine:

__________22) What is the annual tax shield generated by expenses related to the lease?

__________23) What is the net present value of the lease payments?

__________24) Should the company lease or purchase the machine?

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