Ronald McDonald decides to install a fuel storage system for his farm that will save him an estimated 6.5 cents/gallon on his fuel cost. He uses an estimated 20,000 gallons/year on his farm. Initial cost of the system is $10,000, and the annual maintenance the first year is $25, increasing by $25 each year thereafter. After a period of 10 years the estimated salvage is $3000. If money is worth 12%, is the new system a wise investment?

Ronald McDonald decides to install a fuel storage system for his farm that will save him an estimated 6.5 cents/gallon on his fuel cost. He uses an estimated 20,000 gallons/year on his farm. Initial cost of the system is $10,000, and the annual maintenance the first year is $25, increasing by $25 each year thereafter. After a period of 10 years the estimated salvage is $3000. If money is worth 12%, is the new system a wise investment?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 10PA: The Ham and Egg Restaurant is considering an investment in a new oven that has a cost of $60,000,...

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The Ham and Egg Restaurant is considering an investment in a new oven that has a cost of $60,000, with annual net cash flows of $9,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether or not you would recommend that Ham and Egg invest in this oven.
Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
Oliver Douglas decides to install a fuel storage system for his farm that will save him an estimated 6.5 cents/gallon on his fuel cost. Initial cost of the system is $10,000, and the annual maintenance is $25 the first year, increasing by $25 each year thereafter. After a period of 10 years the estimated salvage is $3000. If money is worth 12%, what is the breakeven quantity of fuel?
John's cafe is considering the purchase of a waffle maker that cost $10,000. The waffle maker has an economic life of 5 years and will be fully depreciated by the straight-line method. The machine will produce 1,600 waffles per year, with each costing $2.50 to make and priced at $4.75. The discount rate is 10 percent and the tax rate is 21 percent. What is the NPV of the project?
Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $395,000, to be paid immediately. Bill expects aftertax cash inflows of $86,000 annually for six years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return is 11 percent. What is the project’s profitability index (PI)? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)
Viktor Hovland purchases land with natural gas reserves for $500,000. He expects to extract 2,000 units of natural gas from the reserve. In 5 years, when the land is fully depleted, the cost to restore the land to its prior state will be $100,000 and the land has no residual value. In year 1, he extracts 600 units and sells 500 units. It costs 50 dollars per unit to extract the natural gas. What will the book value of the Asset Retirement Obligatio be AFTER 2 YEARS? The effective interest rate is 8 percent. Use a positive number if it is a debit balance and a negative if it is a credit balance.
Your friend Harold is trying to decide whether to buy or lease his next vehicle. He has gathered information about each option but is not sure how to compare the alternatives. Purchasing a new vehicle will cost $28,000, and Harold expects to spend about $650 per year in maintenance costs. He would keep the vehicle for five years and estimates that the salvage value will be $11,100. Alternatively, Harold could lease the same vehicle for five years at a cost of $3,640 per year, including maintenance. Assume a discount rate of 10 percent. Required: 1. Calculate the net present value of Harold's options. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round your final answers to 2 decimal places. Do not round intermediate calculations.) Purchase Option Lease Option NPV
Bill plans to open a do-it-yourself dog bathing center in a storefront. The bathing equipment will cost $160,000. Bill expects the net cash inflows to be $40,000 annually for 7 years, after which he plans to scrap the equipment and retire to the beaches of Jamaica. Assuming that the required return is 15%, what is the project's Pl? Should it be accepted? a. 1.04; no b. 1.00; indifferent c. 1.04; yes O d. 0.88; no e. 0.88; yes
A new machine is bought by Obsidian Corporation to process potato chips for $75,000. They add a customized conveyor belt to connect it to their current system for $10,000. It will use an extra $2,000 a year in electricity and costs $1,000 to insure. What is the recorded value of the new machine?
Ivanhoe Lumber, Inc., is considering purchasing a new wood saw that costs $45,000. The saw will generate revenues of $100,000 per year for five years. The cost of materials and labor needed to generate these revenues will total $60,000 per year, and other cash expenses will be $10,000 per year. The machine is expected to sell for $1,000 at the end of its five-year life and will be depreciated on a straight-line basis over five years to zero. Ivanhoe's tax rate is 26 percent, and its opportunity cost of capital is 13.70 percent. What is the project's NPV? (Do not round intermediate calculations. Round final answer to 0 decimal places, e.g. 5,275.) NPV $ Should the company purchase the saw? The company the saw.
Viktor Hovland purchases land with natural gas reserves for $500,000. He expects to extract 2,000 units of natural gas from the reserve. In 5 years, when the land is fully depleted, the cost to restore the land to its prior state will be $100,000 and the land has no residual value. In year 1, he extracts 600 units and sells 500 units. It costs 50 dollars per unit to extract the natural gas. What is the ending value of his inventory after 1 year? The effective interest rate is 8 percent.
Crane Lumber, Inc., is considering purchasing a new wood saw that costs $75,000. The saw will generate revenues of $100,000 per year for five years. The cost of materials and labor needed to generate these revenues will total $60,000 per year, and other cash expenses will be $10,000 per year. The machine is expected to sell for $4,400 at the end of its five-year life and will be depreciated on a straight-line basis over five years to zero. Crane’s tax rate is 34 percent, and its opportunity cost of capital is 10.50 percent.- What is the project's NPV? - The copmany should (buy/not buy) the machine?