Exercise 12-3 (Video)

Hillsong Inc. manufactures snowsuits. Hillsong is considering purchasing a new sewing machine at a cost of $2.45 million. Its existing machine was purchased five years ago at a price of $1.8 million; six months ago, Hillsong spent $55,000 to keep it operational. The existing sewing machine can be sold today for $245,788. The new sewing machine would require a one-time, $85,000 training cost. Operating costs would decrease by the following amounts for years 1 to 7:

Year

1

$389,300

2

399,900

3

410,000

4

425,500

5

432,400

6

434,500

7

438,000

The new sewing machine would be depreciated according to the declining-balance method at a rate of 20%. The salvage value is expected to be $379,400. This new equipment would require maintenance costs of $98,800 at the end of the fifth year. The cost of capital is 9%. Click here to view PV table. Use the net present value method to determine the following: (If net present value is negative then enter with negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round present value answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Calculate the net present value.

Net present value

$

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Determine whether Hillsong should purchase the new machine to replace the existing machine?

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Exercise 12-5 (Video)

Bruno 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 $442,000. 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 $101,486 for the next 6 years. Management requires a 10% rate of return on all new investments. Click here to view PV table. Calculate the internal rate of return on this new machine. (Round answer to 0 decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Internal rate of return

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%

Should the investment be accepted?

The investment

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be accepted.

Exercise 12-8 (Video)

Pierre’s Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $310,000. A new salon will normally generate annual revenues of $68,950, with annual expenses (including depreciation) of $40,000. At the end of 15 years the salon will have a salvage value of $76,000. Calculate the annual rate of return on the project.

Annual rate of return

·

· %

Problem 12-4A (Video)

Jane’s Auto Care is considering the purchase of a new tow truck. The garage doesn’t currently have a tow truck, and the $59,960 price tag for a new truck would represent a major expenditure. Jane Austen, owner of the garage, has compiled the estimates shown below in trying to determine whether the tow truck should be purchased.

Initial cost

$59,960

Estimated useful life

8 years

Net annual cash flows from towing

$7,970

Overhaul costs (end of year 4)

$6,000

Salvage value

$11,990