Question:

Payback Period Calculation. Wood Products Company would like to purchase a computerized wood lathe for $100,000. The machine is expected to have a life of 5 years, and a salvage value of $5,000. Annual maintenance costs will total $20,000. Annual net cash receipts resulting from this machine are predicted to be $45,000. The company’s required rate of return is 15 percent (this is the same data as the previous exercise). Determine the payback period for this investment using the format shown in.

Net Present Value Analysis and Qualitative Factors, Alternative Format. Pete’s Plumbing Supplies would like to expand into a new warehouse at a cost of $500,000. The warehouse is expected to have a life of 20 years, and a salvage value of $100,000. Annual costs for maintenance, insurance, and other cash expenses will total $60,000. Annual net cash receipts resulting from this expansion are predicted to be $115,000. The company’s required rate of return is 12 percent.

Required: a. Find the net present value of this investment using the format presented in . Round to the nearest dollar. b. Should the company purchase the new warehouse? Explain. c. Provide one qualitative factor that might cause the company to reach a different conclusion than the one reached in requirement b.

Calculating NPV and IRR Using Excel. Pete’s Plumbing Supplies would like to expand into a new warehouse at a cost of $500,000. The warehouse is expected to have a life of 20 years, and a salvage value of $100,000. Annual costs for maintenance, insurance, and other cash expenses will total $60,000. Annual net cash receipts resulting from this expansion are predicted to be $115,000. The company’s required rate of return is 12 percent. Required: a. Use Excel to calculate the net present value and internal rate of return in a format similar to the Computer Application spreadsheet shown in the chapter. b. Should the company purchase the warehouse? Explain.

Net Present Value Analysis with Taxes. Quality Chocolate, Inc., would like to purchase a new machine for $200,000. The machine will have a life of 4 years with no salvage value, and is expected to generate annual cash revenue of $90,000. Annual cash expenses, excluding depreciation, will total $10,000. The company uses the straight-line depreciation method, has a tax rate of 30 percent, and requires a 14 percent rate of return.

Required: a. Find the net present value of this investment using the format presented in . Round to the nearest dollar. b. Should the company purchase the machine? Explain

41. Evaluating Alternative Investments. Washington Brewery has two independent investment opportunities to purchase brewing equipment so the company can meet growing customer demand. The first option (equipment A) requires an initial investment of $230,000 for equipment with an expected life of 5 years and a salvage value of $20,000. The second option (equipment B) requires an initial investment of $120,000 for equipment with an expected life of 4 years and a salvage value of $15,000. The company’s required rate of return is 10 percent. Additional cash flow information for each investment is provided as follows

42. Required: a. Calculate the net present value for each investment using the format presented in . (Remember to include the initial investment cash outflow and salvage value in your calculation.) Round to the nearest dollar. b. Which, if any, investment is preferable? Explain.