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BA225 Week 6 Ch12

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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.

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.)

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 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%.

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?

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