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BA 225 week 6 Problems




Brief Exercises: BE12-1, BE12-4, BE12-5, BE12-6;Exercise: E12-5;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 10year useful life. Annual depreciation will be $45,000. Compute the cash payback period.;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 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.);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 10;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?;BE12-6 Quillen Company is performing a post-audit of a project completed one year ago.;The initial estimates were 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 costs $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%.;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 rate of return on this new machine. Should the;investment be accepted?


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