Principles of Accounting II

Exercise A - Chapter 11 Capital Budgeting Decisions

EA1.

LO 11.1Bob’s Auto Repair has determined that it needs new lift equipment to acquire more

business opportunities. However, one or more alternatives meet or exceed the minimum

expectations Bob has for the new lift equipment. As a result, what type of decision should Bob

make for his company?

EA2.

LO 11.1In practice, external factors can impact a capital investment. Give a current external

factor that may currently impact or cause instability of capital spending either here or abroad.

EA3.

LO 11.2If a copy center is considering the purchase of a new copy machine with an initial

investment cost of $150,000 and the center expects an annual net cash flow of $20,000 per year,

what is the payback period?

EA4.

LO 11.2Assume a company is going to make an investment of $450,000 in a machine and the

following are the cash flows that two different products would bring in years one through four.

Which of the two options would you choose based on the payback method?

EA5.

LO 11.2If a garden center is considering the purchase of a new tractor with an initial investment

cost of $120,000, and the center expects a return of $30,000 in year one, $20,000 in years two

and three, $15,000 in years four and five, and $10,000 in year six and beyond, what is the

payback period?

EA6.

Exercise A - Chapter 11 Capital Budgeting Decisions

LO 11.2The management of Kawneer North America is considering investing in a new facility

and the following cash flows are expected to result from the investment:

A. What is the payback period of this uneven cash flow?

B. Does your answer change if year 10’s cash inflow changes to $500,000?

EA7.

LO 11.2A mini-mart needs a new freezer and the initial investment will cost $300,000.

Incremental revenues, including cost savings, are $200,000, and incremental expenses, including

depreciation, are $125,000. There is no salvage value. What is the accounting rate of return

(ARR)?

EA8.

LO 11.3You put $250 in the bank for 5 years at 12%.

A. If interest is added at the end of the year, how much will you have in the bank after one

year? Calculate the amount you will have in the bank at the end of year two and continue

to calculate all the way to the end of the fifth year.

B. Use the future value of $1 table in Appendix B and verify that your answer is correct.

EA9.

Exercise A - Chapter 11 Capital Budgeting Decisions

LO 11.3If you invest $12,000 today, how much will you have in (for further instructions on

future value in Excel, see Appendix C):

A. 10 years at 9%

B. 8 years at 12%

C. 14 years at 15%

D. 19 years at 18%

EA10.

LO 11.3You have been depositing money into an account yearly based on the following

amounts, rates, and times. What is the value of that investment account at the end of that period?

EA11.

LO 11.3How much would you invest today in order to receive $30,000 in each of the following

(for further instructions on present value in Excel, see Appendix C):

A. 10 years at 9%

B. 8 years at 12%

C. 14 years at 15%

D. 19 years at 18%

EA12.

LO 11.3Your friend has a trust fund that will pay her the following amounts at the given interest

rate for the given number of years. Calculate the current (present) value of your friend’s trust

fund payments. For further instructions on future value in Excel, see Appendix C.

Exercise A - Chapter 11 Capital Budgeting Decisions

EA13.

LO 11.3Julio Company is considering the purchase of a new bubble packaging machine. If the

machine will provide $20,000 annual savings for 10 years and can be sold for $50,000 at the end

of the period, what is the present value of the machine investment at a 9% interest rate with

savings realized at year end?

EA14.

LO 11.3How much must be invested now to receive $30,000 for 10 years if the first $30,000 is

received one year from now and the rate is 8%?

EA15.

LO 11.4Project A costs $5,000 and will generate annual after-tax net cash inflows of $1,800 for

five years. What is the NPV using 8% as the discount rate?

EA16.

LO 11.4Project B cost $5,000 and will generate after-tax net cash inflows of $500 in year one,

$1,200 in year two, $2,000 in year three, $2,500 in year four, and $2,000 in year five. What is the

NPV using 8% as the discount rate? For further instructions on net present value in Excel,

see Appendix C.

EA17.

LO 11.4Gardner Denver Company is considering the purchase of a new piece of factory

equipment that will cost $420,000 and will generate $95,000 per year for 5 years. Calculate the

IRR for this piece of equipment. For further instructions on internal rate of return in Excel,

see Appendix C.

EA18.

LO 11.4Consolidated Aluminum is considering the purchase of a new machine that will cost

$308,000 and provide the following cash flows over the next five years: $88,000, 92,000,

$91,000, $72,000, and $71,000. Calculate the IRR for this piece of equipment. For further

instructions on internal rate of return in Excel, see Appendix C.

EA19.

Exercise A - Chapter 11 Capital Budgeting Decisions

LO 11.4Redbird Company is considering a project with an initial investment of $265,000 in new

equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The

company’s minimum required rate of return is 8%. What is the internal rate of return? Should

Redbird accept the project based on IRR?

EA20.

LO 11.5Towson Industries is considering an investment of $256,950 that is expected to generate

returns of $90,000 per year for each of the next four years. What is the investment’s internal rate

of return?

EA21.

LO 11.5Cinemar Productions bought a piece of equipment for $55,898 that will last for 5 years.

The equipment will generate net operating cash flows of $14,000 per year and will have no

salvage value at the end of its life. What is the internal rate of return?