117. A capital investment project requires an investment of $450,000.

It has an expected life of six

years with an annual cash flow of $90,000 received at the end of each year. The company uses the
straight-line method of depreciation with no mid-year convention. Ignore income taxes.

Required:

a. Compute payback for the project.

b. Compute the net present value of the project using a 12 percent discount rate.

c. Would you recommend this project be accepted? Why or why not?

ANSWER:

a. 5 years = $450,000/$90,000

b. NPV using a 12 percent discount rate:

Investment $(450,000)

Present value of cash flow ($90,000 × 4.111) 369,990 Net present value $ (80,010)

No, the project should not be accepted. Although the payback period of five years is less than the
expected life of the project, the

c. NPV is negative, indicating the project's return is less than 12 percent. The IRR is approximately
5.5 percent, which is much

lower than the desired return of 12 percent; therefore, the project should be rejected.

118. Fill in the lettered blanks in the following table:

Investment A Investment B Investment C

Amount of investment $80,000 (a) $20,000

Economic life in years 10 5 8

Annual cash flow $10,000 (b) $ 2,500

Payback period in years (c) 4 (d)

Present value of cash flows (e) $66,000 (f)

Net present value

ANSWER: $ 5,500 $ 6,000 ($1,000)

a. $66,000 - $6,000 = $60,000 b. $60,000/4 = $15,000

c. $80,000/$10,000 = 8 d. $20,000/$2,500 = 8

e. $80,000 + $5,500 = $85,500 f. $20,000 - $1,000 = $19,000

119. Absentia Company is evaluating a capital expenditure proposal that has the following predicted
cash flows:

Original investment $45,000

Cash flow:

Year 1 $17,500

Year 2 25,000

Year 3 15,000

Salvage value

-0-

Discount rate Required:

14%

Determine the following values:

a. Net present value of the investment

b. Proposal's internal rate of return

c. Payback period

ANSWER:

a. Period Cash Flow Present Value Factor

Present Value

1 $17,500 0.877 $15,347.50

2 25,000 0.769 19,225.00

3 15,000 0.675 10,125.00

Total present value $44,697.50

Less original investment45,000.00

Net present value $ (302.50)

b. Approximately 14%

c. 2 + $2,500/$15,000 = 2.167 years

120. Wastenot Production Company is considering the purchase of a flexible manufacturing system.
The after-tax cash benefits/savings associated with the system are as follows:

Decreased waste $ 82,500

Increased quality 110,000

Decrease in operating costs 68,750

Increase in on-time deliveries 13,750

The system will cost $825,000 and will last ten years.

The company's cost of capital is 10 percent.

Required:

a. What is the payback period for the flexible manufacturing system?

b. What is the NPV for the flexible manufacturing system?

c. What is the IRR for the flexible manufacturing system?

ANSWER:

a. $825,000/$275,000 = 3 years

b. 6.145 × $275,000 - $825,000 = $864,875 (PVAF n=10, 10%)

c. $825,000/$275,000 = 3.000, which is the present value factor for n = 10, and the interest rate is
slightly greater than 30%.

121. Bertram Corporation is considering an investment in equipment for $150,000.

Data related to the investment are as follows:

Income before

Year Depreciation and Taxes

1 $60,000

2 60,000

3 60,000

4 60,000

5 60,000

Cost of capital is 10 percent.

Bertram uses the straight-line method of depreciation with mid-year convention for tax purposes. In
addition, its tax rate is 40 percent and the depreciable life of the equipment is four years with no salvage
value. The equipment is sold at the end of the fifth year.

Required:

Determine the following amounts using after-tax cash flows:

a. Payback period

b. Accounting rate of return on original investments for each year

c. Net present value

ANSWER:

Years

1 2 3 4 5

Income before

deprec. and taxes $60,000 $60,000 $60,000

$60,000 $60,000

Less: Depreciation 18,750 37,500 37,500 37,500 18,750

Pretax income $41,250 $22,500 $22,500 $22,500

$41,250

Income taxes 16,500 9,000 9,000 9,000 16,500

Net income $24,750 $13,500 $13,500 $13,500

$24,750

Add: Depreciation 18,750 37,500 37,500 37,500 18,750

Cash flow $43,500 $51,000 $51,000 $51,000

$43,500
a. Cumulative Investment

Year Cash Flow Cash Flow Yet to Recover

1 $43,500 $ 43,500 $106,500

2 51,000 94,500 55,500

3 51,000 145,500 4,500

4 51,000

At the beginning of the year, Jim Jackson initiated a quality improvement program. The program was
successful in reducing scrap and rework costs. To help assess the impact of the quality improvement
program, the following data were collected for the current and preceding years:

Preceding Year Current Year

Sales $2,400,000 $2,000,000

Scrap 40,000 30,000

Rework 100,000 70,000

Product inspection 12,000 18,000

Quality training 4,000 5,000

Material inspections 8,000 13,000

Product warranty 80,000 50,000

Refer to Figure 14-5. For the current year, appraisal costs are what percentage of sales?

A. 1.55%

B. 1.80%

C. 0.25%

D. 9.30%

60. Figure 14-5

At the beginning of the year, Jim Jackson initiated a quality improvement program. The program was
successful in reducing scrap and rework costs. To help assess the impact of the quality improvement
program, the following data were collected for the current and preceding years:

Preceding Year Current Year

Sales $2,400,000 $2,000,000

Scrap 40,000 30,000

Rework 100,000 70,000

Product inspection 12,000 18,000

Quality training 4,000 5,000

Material inspections 8,000 13,000

Product warranty 80,000 50,000

Refer to Figure 14-5. For the current year, internal failure costs are what percentage of sales?

A. 9.30%

B. 5.00%

C. 2.50%

D. 7.50%

61. Figure 14-5

At the beginning of the year, Jim Jackson initiated a quality improvement program. The program was
successful in reducing scrap and rework costs. To help assess the impact of the quality improvement
program, the following data were collected for the current and preceding years:

Preceding Year Current Year

Sales $2,400,000 $2,000,000

Scrap 40,000 30,000

Rework 100,000 70,000

Product inspection 12,000 18,000

Quality training 4,000 5,000

Material inspections 8,000 13,000

Product warranty 80,000 50,000

Refer to Figure 14-5. For the current year, external failure costs are what percentage of sales?

A. 9.30%

B. 5.00%

C. 2.50%

D. 7.50%

62. Figure 14-5

At the beginning of the year, Jim Jackson initiated a quality improvement program. The program was
successful in reducing scrap and rework costs. To help assess the impact of the quality improvement
program, the following data were collected for the current and preceding years:

Preceding Year Current Year

Sales $2,400,000 $2,000,000

Scrap 40,000 30,000

Rework 100,000 70,000

Product inspection 12,000 18,000

Quality training 4,000 5,000

Material inspections 8,000 13,000

Product warranty 80,000 50,000

Refer to Figure 14-5. As a result of quality improvements, profits have increased by

A. $400,000.

B. $58,000.

C. $186,000.

D. $244,000.

63. The robust quality model

A. maintains an acceptable quality level.

B. decreases total quality costs by decreasing the number of defective units.

C. balances control costs with failure costs.

D. relies on warranty work.

64. According to the robust quality view,

A. control costs increase without limits.

B. control costs increase as the robust state approaches.

C. failure costs can be driven to zero.

D. all of these.

Payback period = 3 + ($4,500/$51,000) = 3.09 years

b. Years 1 and 5: $24,750/$150,000 = 16.5%

Years 2, 3 and 4: $13,500/$150,000 = 9.0%

c. Period Cash Flow PV Factor Present Value

0 $(150,000) 1.000 $(150,000.00)

1 43,500 0.909 39,541.50

2 51,000 0.826 42,126.00

3 51,000 0.751 38,301.00

4 51,000 0.683 34,833.00

5 43,500 0.621 27,013.50

Net present value $ 31,815.00