LO 11.1Margo’s Memories, a company that specializes in photography and creating family and group photo portfolios, has 50 stores in major malls around the U.S. The company is considering an online business, which will require a substantial investment in web design, security, payment processing, and technology in order to launch successfully. What potential advantages or disadvantages will be difficult to quantify from a capital investment standpoint?

LO 11.1Boxer Production, Inc., is in the process of considering a flexible manufacturing system that will help the company react more swiftly to customer needs. The controller, Mick Morrell, estimated that the system will have a 10-year life and a required return of 10% with a net present value of negative $500,000. Nevertheless, he acknowledges that he did not quantify the potential sales increases that might result from this improvement on the issue of on-time delivery, because it was too difficult to quantify.

If there is a general agreement that qualitative factors may offer an additional net cash flow of $150,000 per year, how should Boxer proceed with this investment?

LO 11.2A restaurant is considering the purchase of new tables and chairs for their dining room with an initial investment cost of $515,000, and the restaurant expects an annual net cash flow of $103,000 per year. What is the payback period?

LO 11.2Assume a company is going to make an investment in a machine of $825,000 and the following are the cash flows that two different products would bring. Which of the two options would you choose based on the payback method?

LO 11.2A grocery store is considering the purchase of a new refrigeration unit with an initial investment of $412,000, and the store expects a return of $100,000 in year one, $72,000 in years two and three, $65,000 in years four and five, and $38,000 in year six and beyond, what is the payback period?

LO 11.2The management of Ryland International is considering investing in a new facility and the following cash flows are expected to result from the investment:

- What is the payback period of this uneven cash flow?
- Does your answer change if year 6’s cash inflow changes to $920,000?

LO 11.2An auto repair company needs a new machine that will check for defective sensors. The machine has an initial investment of $224,000. Incremental revenues, including cost savings, are $120,000, and incremental expenses, including depreciation, are $50,000. There is no salvage value. What is the accounting rate of return (ARR)?

LO 11.3You put $600 in the bank for 3 years at 15%.

- If interest is added at the end of the year, how much will you have in the bank after one year? Calculate the amount you will have in the bank at the end of year two and continue to calculate all the way to the end of the third year.
- Use the future value of $1 table in Appendix B and verify that your answer is correct.

LO 11.3If you invest $15,000 today, how much will you have in (for further instructions on future value in Excel, see Appendix C):

- 20 years at 22%
- 12 years at 10%
- 5 years at 14%
- 2 years at 7%

LO 11.3You have been depositing money into an account yearly based on the following investment amounts, rates and times. What is the value of that investment account at the end of that period?

LO 11.3How much would you invest today in order to receive $30,000 in each of the following (for further instructions on present value in Excel, see Appendix C):

- 20 years at 22%
- 12 years at 10%
- 5 years at 14%
- 2 years at 7%

LO 11.3Your friend has a trust fund that will pay her the following amounts at the given interest rate for the given number of years. Calculate the current (present) value of your friend’s trust fund payments. For further instructions on present value in Excel, see Appendix C.

LO 11.3Conestoga Plumbing plans to invest in a new pump that is anticipated to provide annual savings for 10 years of $50,000. The pump can be sold at the end of the period for $100,000. What is the present value of the investment in the pump at a 9% interest rate given that savings are realized at year end?

LO 11.3How much must be invested now to receive $50,000 for 8 years if the first $50,000 is received in one year and the rate is 10%?

LO 11.4Project X costs $10,000 and will generate annual net cash inflows of $4,800 for five years. What is the NPV using 8% as the discount rate?

LO 11.4Project Y cost $8,000 and will generate net cash inflows of $1,500 in year one, $2,000 in year two, $2,500 in year three, $3,000 in year four and $2,000 in year five. What is the NPV using 8% as the discount rate?

LO 11.4Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return in Excel, see Appendix C.

LO 11.4Garnette Corp is considering the purchase of a new machine that will cost $342,000 and provide the following cash flows over the next five years: $99,000, $88,000, $92,000, $87,000, and $72,000. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return in Excel, see Appendix C.

LO 11.4Wallace Company is considering two projects. Their required rate of return is 10%.

Project A | Project B | |
---|---|---|

Initial investment | $170,000 | $48,000 |

Annual cash flows | $41,352 | $12,022 |

Life of the project | 6 years | 5 years |

Which of the two projects, A or B, is better in terms of internal rate of return?

LO 11.5Taos Productions bought a piece of equipment for $79,860 that will last for 5 years. The equipment will generate net operating cash flows of $20,000 per year and will have no salvage value at the end of its life. What is the internal rate of return?