Homework Answers
Answer a.
Cost of Equipment = $133,000
Annual Cash Flow = $19,500
Salvage Value = $14,500
Useful Life = 7 years
Cost of Capital = 10%
Present Value of Cash Inflows = $19,500 * PVA of $1 (10%, 7) +
$14,500 * PV of $1 (10%, 7)
Present Value of Cash Inflows = $19,500 * 4.8684 + $14,500 *
0.5132
Present Value of Cash Inflows = $102,375.20
NPV = Present Value of Cash Inflows - Initial Investment
NPV = $102,375.20 - $133,000
NPV = -$30,624.80
Answer b.
Present Value Ratio = Present Value of Cash Inflows / Initial
Investment
Present Value Ratio = $102,375.20 / $133,000
Present Value Ratio = 0.77
Answer c.
Let IRR be i%
NPV = -$133,000 + $19,500 * PVA of $1 (i%, 7) + $14,500 * PV of
$1 (i%, 7)
0 = -$133,000 + $19,500 * PVA of $1 (i%, 7) + $14,500 * PV of $1
(i%, 7)
Using financial table, i = 3.05%
IRR of the investment is 3.05%
The internal rate of return of this investment is lower than the cost of capital of 10%
Answer d.
Payback Period = Cost of Equipment / Annual Cash Flow
Payback Period = $133,000 / $19,500
Payback Period = 6.82 years
Add Answer to:
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Cowboy Recording Studio is considering the investment of $133,800 in a new recording equipment. It is estimated that the new equipment will generate additional cash flow of $19,500 per year for each year of its 7-year life and will have a salvage value of $14,000 at the end of its life. Cowboys's financial managers estimate that the firm's cost of capital is 8%. Use Table 6-4 and Table 6-5. (Use appropriate factor(s) from the tables provided. Round the PV factors...
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Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment....
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#2
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c. Compute the return on average investment for
the investment in the new equipment to produce the new luggage
line. (Round your percentage answer to 1 decimal
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expects to sell 151,040 units of the equipment’s product each year.
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$
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equipment)
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