EXERCISE-1 For each of the following situations, identify the correct multiplier to use Then compute the appropriate

present value. (a) (b) (c) Annual net cash flow of Rs.30,000 for five years, discounted at 16% An amount of Rs.25,000 to be received at the end of ten years, discounted at 12% The amounts of Rs.21,000 to be received at the end of two years and Rs.15,000 to be received at the end of the years four, five and six discounted at 10% Annual net cash flow of Rs. 22,500 for twelve years, discounted at 14% The following five years of cash inflows, discounted at 10% Year 1 Rs. 25,000 Year 2 20,000 Year 3 30,000 Year 4 40,000 Year 5 50,000

(d) (e)

ars, discounted

years and

nted at 14%

EXERCISE-2 Winter Haven Corporation manufactures metal hard hats for on-site construction workers. Recently, management has tried to raise productivity to meet the growing demand from real estate industry. The Company is now thinking about a new stamping machine. Management has decided that only capital expenditure that yield 16% return before taxes will be accepted. The following projections for the proposal are given: the new machine will cost Rs.325,000; revenue will increase Rs.98,400 per year; the salvage value of the new machine will be Rs.32,500; operating cost increases (including depreciation) will be Rs.71,200. Using the accounting rate of return method, decide whether the company should invest in the machine. (Show all computations to support your decision, and ignore income tax effects.)

construction

nking about al expenditure rojections for ue will increase

mpany should

EXERCISE-3 MJK Sounds, Inc., a manufacturer of stereo speakers, is thinking about adding a new injection molding machine. This machine can produce speaker parts that the company now buy from outsiders. The machine has an estimated life of fourteen years and will cost Rs.415,000. Gross cash revenue from the machine will be about Rs.397,500 per year, and related cash expenses should total Rs.265,000. Taxes on income are estimated at Rs.45,050 a year. The payback period as set by management should be five years or less. On the basis of the data given, use the payback method to determine whether the company should invest in this new machine. Show your computations to support your answer.

mated life

es should

e whether

EXERCISE-4 Steven Altman and Associates is thinking of buying an automatic extruding machine. This piece of equipment would have a useful life of six years, would cost Rs.219,500, and would increase annual after tax net cash inflows by Rs.57,250. Assume that there is no salvage value at the end of six years. The company's minimum desired rate of return is 14% Using the net present value method, prepare an analysis to determine whether or not the company should purchase the machine.

rs, would

ne whether

PROBLEM-1 The Bagdad Manufacturing Company, based in Wikieup, Arizona, is one of the fastest-growing companies in its industry. According to Mr. Weaver, the company's production vice president, keeping up with technological changes,is what makes the company successful Mr. Weaver feels that a machine introduced recently would fill an important need of the Company. The machine has an expected useful life of four years, a purchase prices of Rs.225,000, and a salvage value of Rs.22,500. The company controller's estimated operating results, using the new machine, are summarized below. The company uses straight line depreciation method for all its machinery. Mr. Weaver uses a 12% minimum desired rate of return and a three year payback period for capital expenditure evaluation purposes. (before tax decision guidelines). Cash Cash Year Revenues Expenses 1 Rs. 305,000 Rs. 250,000 Rs. 2 315,000 250,000 3 325,000 250,000 4 325,000 250,000 REQUIRED: 1 Ignoring income taxes, analyze the purchase of the machine and decide if the company should purchase it. Use the following evaluation approaches in your analysis: (a) the accounting rate of return method, (b) the payback method, and the net present value method. 2 Rework part-1, assuming a 34% tax rate, after-tax guidelines of an 8% minimum desired rate of return, and 3.5 years payback period. Does the decsion change when after tax information is used?

ona, is one of Mr. Weaver, chnological

fill an imporeful life of four f Rs.22,500. The new machine, are ation method for ate of return and on purposes. Net Cash Inflows 55,000 65,000 75,000 75,000

and decide if on approaches ) the payback

of an 8% minimum he decsion change

PROBLEM-2 The Twelfth of leo is a famous restaurant in the New Orleans French Quarter. "Bouillabaisse Kathryun" is the house speciality. Management is currently considering the purchase of a machine that would prepare all the ingredients, mix them automatically, and cook the dish to the restaurant's specifications. The machine will function for an estimated 12 years, and the purchase price including installation is Rs.246,000. Estimated salvage value is Rs.24,600. This labor-saving device is expected to increase cash flows by an average of Rs.42,000 per year during its life. For purposes of capital expenditure decisions, the restaurant uses a 12% minimum desired rate of return. REQUIRED: 1 Using the net present value method to evaluate this capital expenditure, determine whether the company should purchase the machine. Support your answer. 2 If management had decided on a minimum desired rate of return of 14%, should the machine be purchased? Show all computations to support your answer. 3 Assuming straight-line depreciation, a 34% tax rate, and an after tax minimum desired rate of return of 7%, should the company purchase the machine? Show your computations.

s French Quarter. nt is currently ll the ingredients, 's specifications. e purchase price is Rs.24,600. y an average of penditure

expenditure, ne. Support

eturn of 14%, o support your

purchase the

ASSIGNMENT The McVan Hotel Syndicate owns four report hotels in southern lowa and Missouri. Because their Hermann, Missouri operation (Hotel 3) has been booming over the past three years, management has decided to add a new wing to increase capacity by 20%. A construction firm has bid on the proposed new wing. The Building would have a 20-year life, and the company uses straight-line depreciation. Deluxe accomodations are high lighted in this contractor's proposal. The new wing would cost Rs.29,000,000 to construct, have a salvage value of Rs.2,900,000, and is expected to generate the following cash flows: Increase in Increase in Cash inflows Cash operating Years from Room Rentals Expenses 1 -7 (each year) 17,900,000 12,800,000 8 20,000,000 14,600,000 9 22,100,000 15,900,000 10 - 20 (each year) 24,200,000 17,700,000 Capital investment projects must generate a 12% after tax minimum desired rate of return to qualify for construction. Assume a 34% tax rate. REQUIRED: Evaluate the proposal from the contractor using net present value analysis, and make a recommendation to management.

proposed

1595000

nalysis, and

Increase in Cash inflows Years 1 -7 (each year) 8 9 10 - 20 (each year) from Room Rentals 17,900,000 20,000,000 22,100,000 24,200,000

Years 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Inflows
17,900,000 17,900,000 17,900,000 17,900,000 17,900,000 17,900,000 17,900,000 20,000,000 22,100,000 24,200,000 24,200,000 24,200,000 24,200,000 24,200,000 24,200,000 24,200,000 24,200,000 24,200,000 24,200,000

Expenses
12,800,000 12,800,000 12,800,000 12,800,000 12,800,000 12,800,000 12,800,000 14,600,000 15,900,000 17,700,000 17,700,000 17,700,000 17,700,000 17,700,000 17,700,000 17,700,000 17,700,000 17,700,000 17,700,000

Revenues 5,100,000 5,100,000 5,100,000 5,100,000 5,100,000 5,100,000 5,100,000 5,400,000 6,200,000 6,500,000 6,500,000 6,500,000 6,500,000 6,500,000 6,500,000 6,500,000 6,500,000 6,500,000 6,500,000

20 Total

24,200,000

17,700,000

6,500,000 118,800,000

433,600,000

314,800,000

Increase in Cash operating Expenses 12,800,000 14,600,000 15,900,000 17,700,000

Depreciation 1595000 1595000 1595000 1595000 1595000 1595000 1595000 1595000 1595000 1595000 1595000 1595000 1595000 1595000 1595000 1595000 1595000 1595000 1595000

EBT 3,505,000 3,505,000 3,505,000 3,505,000 3,505,000 3,505,000 3,505,000 3,805,000 4,605,000 4,905,000 4,905,000 4,905,000 4,905,000 4,905,000 4,905,000 4,905,000 4,905,000 4,905,000 4,905,000

Direct Tax Deduction 3,366,000 3,366,000 3,366,000 3,366,000 3,366,000 3,366,000 3,366,000 3,564,000 4,092,000 4,290,000 4,290,000 4,290,000 4,290,000 4,290,000 4,290,000 4,290,000 4,290,000 4,290,000 4,290,000

Indirect Taxes 2,313,300 2,313,300 2,313,300 2,313,300 2,313,300 2,313,300 2,313,300 2,511,300 3,039,300 3,237,300 3,237,300 3,237,300 3,237,300 3,237,300 3,237,300 3,237,300 3,237,300 3,237,300 3,237,300

PV Multiplier

4.563756539

0.403883228 0.360610025 0.321973237 0.287476104 0.256675093 0.22917419 0.204619813 0.182696261 0.163121662 0.145644341 0.13003959 0.116106777

1595000 31,900,000

4,905,000 86,900,000

4,290,000 78,408,000

3,237,300 57,354,000

0.103666765 SALVAGE PV NCF COST NPV

NCF

15,361,604.51

7.469443624 5.328249792

4,290,000 4,290,000

1,439,439.82 1,475,616.22 1,381,265.18 1,233,272.49 1,101,136.15 983,157.28 877,819.00 783,766.96 699,791.93 624,814.22 557,869.84 498,098.07

2,867,700 15,950,000

0.179793103

444,730.42 27,462,382.10 300,633.62 27,763,015.72 29,000,000 (1,236,984.28)

32,043,913.15 22,858,191.61 9,185,721.54

9,185,721.54