BA 225 week 6 Problems

Brief Exercises: BE12-1, BE12-4, BE12-5, BE12-6
Exercise: E12-5
BE12-1 Bella Company is considering purchasing new equipment for $450,000. It is
expected that the equipment will produce net annual cash flows of $50,000 over its 10year useful life. Annual depreciation will be $45,000. Compute the cash payback period.
BE12-4 Caine Bottling Corporation is considering the purchase of a new bottling
machine. The machine would cost $200,000 and has an estimated useful life of years with
zero salvage value. Management estimates that the new bottling machine will provide net
annual cash flows of $34,000. Management also believes that the new bottling machine
will save the company money because it is expected to be more reliable than other
machines, and thus will reduce downtime. How much would the reduction in downtime
have to be worth in order for the project to be acceptable? Assume a discount rate of 9%.
(Hint: Calculate the net present value.)
BE12-5 Beacon Company is considering two different, mutually exclusive capital
expenditure proposals. Project A will cost $400,000, has an expected useful life of 10
years, a salvage value of zero, and is expected to increase net annual cash flows by
$70,000. Project B will cost $280,000, has an expected useful life of 10 years, a salvage
value of zero, and is expected to increase net annual cash flows by $50,000. A discount
rate of 9% is appropriate for both projects. Compute the net present value and
profitability index of each project. Which project should be accepted?
BE12-6 Quillen Company is performing a post-audit of a project completed one year ago.
The initial estimates were the project would cost $250,000, would have a useful life of 9
years, zero salvage value, and would result in net annual cash flows of $46,000 per year.
Now that the investment has been in operation for 1 year revised figures indicate that it
actually costs $260,000, will have a useful life of 11 years, and will produce net annual
cash flows of $39,000 per year. Evaluate the success of the project. Assume a discount
rate of 10%.
E12-5 Eisler Corporation is involved in the business of injection molding of plastics. It is
considering the purchase of a new computer-aided design and manufacturing machine for
$430,000. The company believes that with this new machine it will improve productivity
and increase quality, resulting in an increase in net annual cash flows of $101,000 for the
next 6 years. Management requires a 10% rate of return on all new investments.
INSTRUCTIONS: Calculate the rate of return on this new machine. Should the
investment be accepted?

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