(A) Determine the payback period for this project.
P10–1 Payback period Jordan Enterprises is considering a capital expenditure that requires an initial investment of $42,000 and returns after-tax cash inflows of $7,000 per year for 10 years. The firm has a maximum acceptable payback period of 8 years.
(A) Determine the payback period for this project.
(B) Should the company accept the project? Why or why not?
P10–6 NPV for varying costs of capital Dane Cosmetics is evaluating a new fragrance-mixing machine. The machine requires an initial investment of $24,000 and will generate after-tax cash inflows of $5,000 per year for 8 years. For each of the costs of capital listed, (1) calculate the net present value (NPV), (2) indicate whether to accept or reject the machine, and (3) explain your decision.
a. The cost of capital is 10%.
b. The cost of capital is 12%.
c. The cost of capital is 14%.
P10–16 IRR: Mutually exclusive projects Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the firm’s warehouse capacity. The relevant cash flows for the projects are shown in the following table. The firm’s cost of capital is 15%.
| Project X | Project Y | |
| Initial investment (CF 0) | $500,000 | $325,000 |
| Year (t) | Cash inflows (CFt ) | |
| 1 | $100,000 | $140,000 |
| 2 | 120,000 | 120,000 |
| 3 | 150,000 | 95,000 |
| 4 | 190,000 | 70,000 |
| 5 | 250,000 | 50,000 |
a. Calculate the IRR to the nearest whole percent for each of the projects.
b. Assess the acceptability of each project on the basis of the IRRs found in part a.
c. Which project, on this basis, is preferred?
P10–22 Payback, NPV, and IRR Rieger International is attempting to evaluate the feasibility of investing $95,000 in a piece of equipment that has a 5-year life. The firm has estimated the cash inflows associated with the proposal as shown in the following table. The firm has a 12% cost of capital.
| Year (t) | Cash inflows (CFt ) |
| 1 | $20,000 |
| 2 | 25,000 |
| 3 | 30,000 |
| 4 | 35,000 |
| 5 | 40,000 |
a. Calculate the payback period for the proposed investment.
b. Calculate the net present value (NPV) for the proposed investment.
c. Calculate the internal rate of return (IRR), rounded to the nearest whole percent, for the proposed investment.
d. Evaluate the acceptability of the proposed investment using NPV and IRR. What recommendation would you make relative to implementation of the project? Why?
P11–1 Classification of expenditures Given the following list of outlays, indicate whether each is normally considered a capital expenditure or an operating expenditure. Explain your answers.
a. An initial lease payment of $5,000 for electronic point-of-sale cash register systems
b. An outlay of $20,000 to purchase patent rights from an inventor
c. An outlay of $80,000 for a major research and development program
d. An $80,000 investment in a portfolio of marketable securities
e. A $300 outlay for an office machine
f. An outlay of $2,000 for a new machine tool
g. An outlay of $240,000 for a new building
h. An outlay of $1,000 for a marketing research report
P11–7 Book value Find the book value for each of the assets shown in the accompanying table, assuming that MACRS depreciation is being used. See Table 4.2 on page 120 for the applicable depreciation percentages.
| Asset | Installed cost | Recovery period (years) | Elapsed time since purchase (years) |
| A | $ 950,000 | 5 | 3 |
| B | 40,000 | 3 | 1 |
| C | 96,000 | 5 | 4 |
| D | 350,000 | 5 | 1 |
| E | 1,500,000 | 7 | 5 |
Table 4.2 Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes
| Percentage by recovery year a | ||||
| Recovery year | 3 years | 5 years | 7 years | 10 years |
| 1 | 33% | 20% | 14% | 10% |
| 2 | 45 | 32 | 25 | 18 |
| 3 | 15 | 19 | 18 | 14 |
| 4 | 7 | 12 | 12 | 12 |
| 5 | 12 | 9 | 9 | |
| 6 | 5 | 9 | 8 | |
| 7 | 9 | 7 | ||
| 8 | 4 | 6 | ||
| 9 | 6 | |||
| 10 | 6 | |||
| 11 | 4 | |||
| Totals | 100% | 100% | 100% | 100% |
| a These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance depreciation using the half-year convention. |
| Year | Cost (1) | Percentages (from Table 4.2 ) (2) | Depreciation [(1) × (2)] (3) |
| 1 | $40,000 | 20% | $ 8,000 |
| 2 | 40,000 | 32 | 12,800 |
| 3 | 40,000 | 19 | 7,600 |
| 4 | 40,000 | 12 | 4,800 |
| 5 | 40,000 | 12 | 4,800 |
| 6 | 40,000 | 5 | 2,000 |
| Totals | 100% | $40,000 |
P11–11 Calculating initial investment Vastine Medical, Inc., is considering replacing its existing computer system, which was purchased 2 years ago at a cost of $325,000. The system can be sold today for $200,000. It is being depreciated using MACRS and a 5-year recovery period (see Table 4.2 , page 120 .) A new computer system will cost $500,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 40% tax rate.
(C) Calculate the book value of the existing computer system.
(D) Calculate the after-tax proceeds of its sale for $200,000.
(E) Calculate the initial investment associated with the replacement project.
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