Keystone Healthcare Corp. is proposing to spend $260,820 on an eight-year project that has estimated net cash flows of$42,000 for each of the eight years.

a. Compute the net present value, using a rate of return of 10%. Use the present value of an annuity of $1 table in the chapter.

b. Based on the analysis prepared in part (a), is the rate of return (1) more than 10%, (2) 10%, or (3) less than 10%? Explain.

c. Determine the internal rate of return by computing a present value factor for an annuity of$1 and using the present value of an annuity of $1 table presented in the text.

The plant manager of Shenzhen Electronics Company is considering the purchase of new automated assembly equipment. The new equipment will cost $1,400,000. The manager believes that the new investment will result in direct labor savings of$350,000 per year for 10 years.

a. What is the payback period on this project?

b. What is the net present value, assuming a 10% rate of return? Use the present value of an annuity of $1 table.

c. What else should the manager consider in the analysis?

Bi-Coastal Railroad Inc. is considering acquiring equipment at a cost of $520,000. The equipment has an estimated life of eight years and no residual value. It is expected to provide yearly net cash flows of$104,000. The company’s minimum desired rate of return for net present value analysis is 10%.

Compute the following:

a. The average rate of return, assuming the annual earnings are equal to the net cash flows less the annual depreciation expense on the equipment.

b. The cash payback period.

c. The net present value. Use the present value of an annuity of $1 table appearing in this chapter. Round to the nearest dollar.

How are investments in sustainability justified?

Diamond & Turf Inc. is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 150 baseballs per hour to sewing 290 per hour. The contribution margin per unit is $0.32 per baseball. Assume that any increased production of baseballs can be sold. The second machine is an automatic packing machine for the golf ball line. The packing machine will reduce packing labor cost. The labor cost saved is equivalent to$21 per hour. The sewing machine will cost $260,000, will have an eight-year life, and will operate for 1,800 hours per year. The packing machine will cost$85,000, will have an eight-year life, and will operate for 1,400 hours per year. Diamond & Turf seeks a minimum rate of return of 15% on its investments.

a. Determine the net present value for the two machines. Use the present value of an annuity of $1 table in the chapter. Round to the nearest dollar.

b. Determine the present value index for the two machines. Round to two decimal places.

c. If Diamond & Turf has sufficient funds for only one of the machines and qualitative factors are equal between the two machines, in which machine should it invest? Explain.

Dip N’ Dunk Doughnuts has computed the net present value for capital expenditure at two locations. Relevant data related to the computation are as follows:

$$\begin{array}{lrr} &\textbf{Fort Collins}& \textbf{Boulder}\\ \hline \text{Total present value of net cash flow}& \$607,600 &\$624,000\\ \text{Less amount to be invested}& \underline{620,000} & \underline{8600,000}\\ \text{Net present value }& \underline{\underline{\$(12,400)}} & \underline{\underline{\$ \hspace{5pt}24,000}}\\ \end{array}$$

a. Determine the present value index for each proposal.

b. Which location does your analysis support? Explain.

Give an example of a qualitative factor that should be considered in a capital investment analysis related to acquiring automated factory equipment.

Carnival Corporation has recently placed into service some of the largest cruise ships in the world. One of these ships, the Carnival Breeze, can hold up to 3,600 passengers, and it can cost $800 million to build. Assume the following additional information:

• There will be 330 cruise days per year operated at a full capacity of 3,600 passengers.
• The variable expenses per passenger are estimated to be$110 per cruise day.
• The revenue per passenger is expected to be $250 per cruise day.
• The fixed expenses for running the ship, other than depreciation, are estimated to be$20,000,000 per year.
• The ship has a service life of 10 years, with a residual value of $200,000,000 at the end of 10 years.

a. Determine the annual net cash flow from operating the cruise ship.

b. Determine the net present value of this investment, assuming a 12% minimum rate of return. Use the present value tables provided in the chapter in determining your answer.

What are the major advantages of leasing a fixed asset rather than purchasing it?

Briggs Excavation Company is planning an investment of $132,000 for a bulldozer. The bulldozer is expected to operate for 1,500 hours per year for five years. Customers will be charged$110 per hour for bulldozer work. The bulldozer operator costs $28 per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing$8,000. The bulldozer uses fuel that is expected to cost $46 per hour of bulldozer operation.

a. Determine the equal annual net cash flows from operating the bulldozer.

b. Determine the net present value of the investment, assuming that the desired rate of return is 10%. Use the present value of an annuity of$1 table in the chapter (Exhibit 5). Round to the nearest dollar.

c. Should Briggs invest in the bulldozer, based on this analysis? Explain.

d. Determine the number of operating hours such that the present value of cash flows equals the amount to be invested.

What are the major disadvantages of the use of the internal rate of return method of analyzing capital investment proposals?

The following data are accumulated by Lone Peak Inc. in evaluating two competing capital investment proposals:

$$\begin{array}{lrr} &\textbf{3D Printer}& \textbf{Truck}\\ \hline \text{Amount of investment}& \$40,000& \$50,000\\ \text{Useful life}& 7 \text{years}&10\text{ years}\\ \text{Estimated residual value}& \$3,000 &\$6,000\\ \text{Estimated total income over the useful life }&\$24,080& \$36,400\\ \end{array}$$

Determine the expected average rate of return for each proposal.

The capital investment committee of Ellis Transport and Storage Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows:

$$\begin{array}{cc} \begin{array}{rr} \hspace{50pt} \begin{array}{r} \hspace{20pt}\text { Warehouse } \hspace{20pt}\\ \hline \end{array} \hspace{50pt}&\begin{array}{r} \text { Tracking Technology }\\ \hline \end{array} \end{array}\\ \begin{array}{lccccc} \text { Year } & \begin{array}{c} \text { Income from } \\ \text { Operations } \end{array} & \begin{array}{c} \text { Net Cash } \\ \text { Flow } \end{array} & & \begin{array}{c} \text { Income from } \\ \text { Operations } \end{array} & \begin{array}{c} \text { Net Cash } \\ \text { Flow } \end{array} \\ \hline 1 & \$ 61,400 & \$ 135,000 & & \$ 34,400 & \$ 108,000 \\ 2 & 51,400 & 125,000 & & 34,400 & 108,000 \\ 3 & 36,400 & 110,000 & & 34,400 & 108,000 \\ 4 & 26,400 & 100,000 & & 34,400 & 108,000 \\ 5 & \underline{(3,600)} & \underline{70,000} & & \underline{34,400} & \underline{108,000} \\ \text { Total } & \underline{\underline{\$ 172,000}} & \underline{\underline{\$ 540,000}} & & \underline{\underline{\$ 172,000}} & \underline{\underline{\$ 540,000}} \\ \end{array} \end{array}$$

Each project requires an investment of $368,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis.

Instructions

1. Compute the following:

a. The average rate of return for each investment. Round to one decimal place.

b. The net present value for each investment. Use the present value of$1 table appearing in this chapter.. Round present values to the nearest dollar.

2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two projects.

The capital investment committee of Nature’s Portrait Landscaping Company is considering two capital investments. The estimated income from operations and net cash flows from each investment are as follows:

$$\begin{array}{cc} \begin{array}{lr} \begin{array}{l} \textbf{Front-End Loader}\\ \hline \end{array} & \hspace{25pt} \begin{array}{r} \textbf{Greenhouse Fixtures}\\ \hline \end{array} \end{array}\\ \begin{array}{lrrrr} &\textbf{Income from} &\textbf{Net Cash } \hspace{25pt} &\textbf{Income from} &\textbf{Net Cash}\\ \textbf{Year} & \textbf{Operations} & \textbf{Flow} \hspace{25pt} & \textbf{Operations} &\textbf{Flow}\\ \hline 1& \$25,000& \$ 40,000 \hspace{25pt} & \$11,250 & \$ 26,250\\ 2& 20,000& 35,000 \hspace{25pt} &11,250& 26,250\\ 3 &7,000& 22,000 \hspace{25pt} & 11,250 &26,250\\ 4& 3,000 &18,000 \hspace{25pt} &11,250 &26,250\\ 5& 1,250 &16,250 \hspace{25pt} & 11,250& 26,250\\ \text{Total}& \$56,250 & \$131,250 \hspace{25pt} & \$56,250& \$131,250\\ \end{array} \end{array}$$

Each project requires an investment of $75,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis.

Instructions

1. Compute the following:

a. The average rate of return for each investment. Round to one decimal place.

b. The net present value for each investment. Use the present value of$1 table appearing in this chapter. Round present values to the nearest dollar.

2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.