Work the following Review Questions

| October 22, 2018

Module 9 Review
Questions

I.
Payback
period and computation; even cash flows

Compute the
payback period for each of the following two separate investments (round the
payback period to two decimals):

1.
A
new operating system for an existing machine is expected to cost $260,000 and
have a useful life of five years. The system yields an incremental after-tax
income of $75,000 each year after deducting its straight-line depreciation. The
predicted salvage value of the system is $10,000.

2. A machine costs $190,000, has a
$10,000 salvage value, is expected to last nine years

II.
Payback
period computation; uneven cash flows

Wenro Company is considering the
purchase of an asset for $90,000. It is expected to produce the following net
cash flows. The cash flows occur evenly throughout each year. Compute the
payback period for this investment.

III.
Accounting
Rate of Return

A machine costs $500,000 and is
expected to yield an after-tax net income of $15,000 each year. Management predicts
this machine has a 10-year service life and a $100,000 salvage value, and it
uses straight-line depreciation. Compute this machine’s accounting rate of
return.
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IV. Computing
Net Present Value

K2B Company 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 $240,000 with a 12-year life and no salvage
value. It will be depreciated on a straight -line basis. The company expects to
sell 96,000 units of the equipment’s product each year. The expected annual
income related to this equipment follows:
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K2B
concludes that the investment must earn at least an 8% return. Compute the net
present value of this investment. (Round the net present value to the nearest
dollar.)

V.
Net
Present Value

Interstate Manufacturing is
considering either replacing one of its old machines with a new machine or
having the old machine overhauled. Information about the two alternatives
follows. Management requires a 10% rate of return on its investments.

Alternative
1:
Keep the old machine and have it overhauled. If the old machine isoverhauled,
it will be kept for another five years and then sold for its salvage value.
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Alternative 2: Sell the old machine and buy a new
one. The new machine will be moreefficient and will yield substantial
operating cost savings with more products produced and sold.
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1. Determine the net present value of
alternative 1.

2. Determine the net present value of
alternative 2.

3. Which alternative do you recommend
management select? Explain.

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