Question

Exercise 11-1 Payback period computation; uneven cash flows LO P1 Beyer Company is considering the purchase of an asset for $210,000. It is expected to produce the following net cash flows. The cash flows occur evenly within each year. Year1 $64,000 $33,000 62,000 $150,000 $28,000 $337,000 Year2 Year3 Year 4 Year5 Total Net cash flows Compute the payback period for this investment. (Cumulative net cash outflows must be entered with a minus sign. Round your Payback Period answer to 2 decimal place.) Cash inflowCumulative Net Year Cash Inflow Outflow) 0 (210,000) 4 Payback period Exercise 11-5 Payback period computation; even cash flows LO P1 Compute the payback period for each of these two separate investments a. A new operating system for an existing machine is expected to cost $250,000 and have a useful life of four years. The system yields an incremental after-tax income of $72,115 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000 b. A machine costs $170,000, has a $13,000 salvage value, is expected to last ten years, and will generate an after-tax income of $39,000 per year after straight-line depreciation Payback Period Choose Numerator:I Choose Denominator: Payback Period Payback periood a. b. Exercise 11-7 Accounting rate of return LO P2 A machine costs $600,000 and is expected to yield an after-tax net income of $23,000 each year. Management predicts this machine has a 8-year service life and a $120,000 salvage value, and it uses straight-line depreciation. Compute this machine's accounting rate of return. Accounting Rate of Return Choose Numerator: Choose Denominator: Accounting Rate of Return Accounting rate of return Exercise 11-9 Computing net present value LO P3 B2B Co. 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 $369,600 with a 6-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 147,840 units of the equipment's product each year. The expected annual income related to this equipment follows Sales Costs s 231,000 Materials, labor, and overhead (except depreciation on new equipment) 81,000 61,600 23,100 165,700 65,300 19,590 $ 45,710 Depreciation on new equipment Selling and administrative expenses Total costs and expenses Pretax income Income taxes (30%) Net income lf at least an 9% return on this investment must be earned, compute the net present value of this investment. (PV of $1. Evof $1, PVAof $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Chart Values are Based on: Select Chart Amount X PV FactorPresent Value Net present value Exercise 11-10 NPV and profitability index LO P3 Following is information on two alternative investments being considered by Jolee Company. The company requires a 6% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Project B $ (158,960) Project A $ (181,325) Initial investment Expected net cash flows in year: 40,000 55,000 91,295 93,400 71,000 25,000 61,000 65,000 66,000 25,000 a. For each alternative project compute the net present value b. For each alternative project compute the profitability index. If the company can only select one project, which should it choose? Complete this question by entering your answers in the tabs below. RequiredA Required B For each alternative project compute the net present value Project A Initial Investment 181,325 Chart Values are Based on: YearCash InflowX PV FactorPresent Value Ch 11 Ex 11-10 6 Saved Project A Initial Investment 181,325 Chart Values are Based on: 25 points Year Cash inflow x PV Factor = Present Value 2 4 eBook 5 Hint Ask Project B Print Initial Investment 158,960 Year Cash Inflow xPV Factor Present Value References 2 4 Mc Graw Hill Education Prev1 of 1 Required A Required B For each alternative project compute the profitability index. If the company can only select one project, which should it choose? Profitability Index Choose Numerator: Choose Denominator:Profitability Index Profitability index Project A Project B If the company can only select one project, which should it choose? Required A Required B

Answer 1

Solution 11-1:

Year	Cash Inflow (Outflow)	Cumulative Net cash inflow (Outflow)
0	-$210,000.00	-$210,000.00
1	$64,000.00	-$146,000.00
2	$33,000.00	-$113,000.00
3	$62,000.00	-$51,000.00
4	$150,000.00	$99,000.00
5	$28,000.00	$127,000.00
Calculate the portion of the year:	3
Numerator for partial year	$51,000.00
Denominator for partial year	$150,000.00
Payback period =	3.34	Years

Solution 11-5:

a. Annual depreciation = ($250,000 - $10,000)/4 = $60,000

Annual cash inflows = After tax net income + Depreciation = $72,115 + $60,000 = $132,115

b. Annual depreciation = ($170,000 - $13,000) / 10 = $15,700

Annual cash inflows = After tax net income + Depreciation = $39,000 + $15,700 = $54,700

Payback period
Particulars	Choose Numerator	/	Choose Denominator	=	Payback Period
	Initial Investment	/	Annual Cash inflows	=	Payback Period
a.	$250,000.00	/	$132,115.00	=	1.89	Years
b.	$170,000.00	/	$54,700.00	=	3.11	Years

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