Brief Exercises: BE12-1

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 10-year useful life. Annual depreciation will be $45,000. Compute the cash payback period.

Brief Exercises: BE12-4

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 8 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.)

Brief Exercises: BE12-5

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 1 0 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?

Brief Exercises: BE12-6

BE12-6 Quillen Company is performing a post-audit of a project completed one year ago. The initial estimates were that 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 cost $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%.

Exercise: E12-5

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 internal rate of return on this new machine. Should the investment be accepted?

Answer the Following Question:

Discuss the significance of recognizing the time value of money in the long-term impact of the capital budgeting decision