Cost Accounting (14th Edition)

. Calculate the payback period for each of the three projects. Ignore income taxes. Using the payback
method, which projects should Andrews choose?
2. Bart thinks that projects should be selected based on their NPVs. Assume all cash flows occur at the end
of the year except for initial investment amounts. Calculate the NPV for each project. Ignore income taxes.
3. Which projects, if any, would you recommend funding? Briefly explain why.
ASSIGNMENT MATERIAL 767
21-23 DCF, accrual accounting rate of return, working capital, evaluation of performance, no income
taxes. Century Lab plans to purchase a new centrifuge machine for its New Hampshire facility. The machine
costs $137,500 and is expected to have a useful life of eight years, with a terminal disposal value of $37,500.
Savings in cash operating costs are expected to be $31,250 per year. However, additional working capital is
needed to keep the machine running efficiently. The working capital must continually be replaced, so an
investment of $10,000 needs to be maintained at all times, but this investment is fully recoverable (will be
“cashed in”) at the end of the useful life. Century Lab’s required rate of return is 14%. Ignore income taxes in
your analysis. Assume all cash flows occur at year-end except for initial investment amounts. Century Lab
uses straight-line depreciation for its machines.
1. Calculate net present value.
2. Calculate internal rate of return.
3. Calculate accrual accounting rate of return based on net initial investment.
4. Calculate accrual accounting rate of return based on average investment.
5. You have the authority to make the purchase decision. Why might you be reluctant to base your decision
on the DCF methods?
21-24 New equipment purchase, income taxes. Anna’s Bakery plans to purchase a new oven for its
store. The oven has an estimated useful life of four years. The estimated pretax cash flows for the oven are
as shown in the table that follows, with no anticipated change in working capital. Anna’s Bakery has a 12%
after-tax required rate of return and a 40% income tax rate. Assume depreciation is calculated on a straightline
basis for tax purposes using the initial oven investment and estimated terminal disposal value of the
oven. Assume all cash flows occur at year-end except for initial investment amounts.
Required
1
2
3
4
5
A
B
C
D
E
F
Relevant Cash Flows at End of Each Year
0 1 2 3 4
Initial machine investment $(88,000)
Annual cash flow from operations
(excluding the depreciation effect) $36,000 $36,000 $36,000 $36,000
Cash flow from terminal disposal of machine
$ 8,000
1. Calculate (a) net present value, (b) payback period, and (c) internal rate of return.
2. Calculate accrual accounting rate of return based on net initial investment.
Required
21-25 New equipment purchase, income taxes. Innovation, Inc., is considering the purchase of a new
industrial electric motor to improve efficiency at its Fremont plant. The motor has an estimated useful life of
five years. The estimated pretax cash flows for the motor are shown in the table that follows, with no anticipated
change in working capital. Innovation has a 10% after-tax required rate of return and a 35% income
tax rate. Assume depreciation is calculated on a straight-line basis for tax purposes. Assume all cash flows
occur at year-end except for initial investment amounts.
1
2
3
4
5
A
B
C
D
E
F
G
Relevant Cash Flows at End of Each Year
0 1 2 3 4 5
I nitial motor investment
$(75,000)
Annual cash flow from operations
(excluding the depreciation effect)
$25,000 $25,000 $25,000 $25,000 $25,000
C ash flow from terminal disposal of motor
$ 0