## MA08 - H08 ## Shoreview, Inc. would like to purchase a specialized tractor for $2,000,000. The machine is expected to have a life of five years, and a salvage value of $600,000. Annual maintenance costs will total $100,000. Annual labor savings are predicted to be $560,000. The company's required rate of return is 15 percent. Factors for a 15 percent interest rate for five years are shown below: Present Value of $1 Present Value of an Annuity 0.4972 3.3522 Based on the company's net present value (NPV) calculation, the company should: Invest in the proposal since the NPV is 1,840,332 Invest in the proposal since the NPV is $159,668. Reject the proposal since the NPV is ($159,668). Reject the proposal since the NPV is ($1,840,332). ## MA08 – H10## Dumont, Inc. is considering a project with an initial investment of $120,000 and annual cash inflows of $24,000 per year for seven years. The company's cost of capital is 12 percent. Factors for a 12 percent interest rate for seven years are shown below: Present Value of $1 0.452 Present Value of an Annuity 4.564 Based on the company's net present value (NPV) calculation, the company should: O invest in the proposal since the NPV is $109,536. reject the proposal since the NPV is ($109,536). reject the proposal since the NPV is ($10,464). O invest in the proposal since the NPV is $10,464. ##M08 – H11 ## Camden Company would like to purchase new production equipment for $170,000. The machine is expected to generate a cost savings of $46,000 per year for five years. The company's cost of capital is 10 percent. Factors for a 10 percent interest rate for five years are shown below: Present Value of $1 0.621 Present Value of an Annuity 3.791 Based on the company's net present value (NPV) calculation, the company should: ○ Invest in the proposal since the NPV is $160,000. ○ Invest in the proposal since the NPV is $4,386. ◇ Reject the proposal since the NPV is $174,386. ◇ Reject the proposal since the NPV is ($4,386). ## MA08 – H12 ## A project requires an initial investment of $750,000 and will return $210,000 each year for six years. The company's discount rate is 10%, and factors for the present value of an annuity at 10% are as follows: Year 1: 0.9091 Year 2: 1.7355 Year 3: 2.4869 Year 4: 3.1699 Year 5: 3.7908 Year 6: 4.3553 Based on the on the net present (NPV) for this project, the company should: reject the proposal since the NPV is ($164,613). invest in the proposal since the NPV is $914,613. invest in the proposal since the NPV is $164,613. ○ invest in the proposal since the NPV is $1,664,613. ## M08- H25 ## Freeport, Inc. is considering a long term investment proposal that will generate $300,000 in cash inflows per year for 7 years and has $180,000 of cash outflows for the same period (before income taxes). The cost of the asset is $210,000 and it will be depreciated using straight-line depreciation over the 7 year life. The asset has no salvage value. Freeport's tax rate is 30%. The cost of capital is 9%. The factors for the present value of an annuity at 9% are shown below. Year 1: 0.9174 Year 2: 1.7591 Year 3: 2.5313 Year 4: 3.2397 Year 5: 3.8897 Year 6: 4.4859 Year 7: 5.0330 The net present value of this investment (rounded to the nearest dollar) is a) $242,970 \b) $258,069 \ c) $476,700 \ d) $499,590 ## M08 - H32 ## Milford Company wants to buy a new delivery truck and has narrowed its options to two choices. Both trucks cost $80,000. The following data shows the expected cash inflows from each truck: Year Truck 1 Truck 2 1 $40,000 $120,000 2 40,000 0 3 40,000 0 When calculating net present value, Milford uses the same cost of capital for both trucks and both trucks have a positive net present value. Based on this information, which statement is true? Truck 1 and Truck 2 will have the same net present values. Truck 1 will have a higher net present value than Truck 2. Truck 1 and Truck 2 will have the same internal rates of return. ○ Truck 1 will have a lower net present value than Truck 2. ## M08 - H33 ## Riverton, Inc. would like to purchase a new production machine and has two options, each requiring an initial investment of $54,000. The company's hurdle rate is 14 percent. The cash inflows for each investment are provided below. Machine A Machine B Year 1 $ 10,000 $ 35,000 Year 2 15,000 25,000 Year 3 25,000 20,000 Year 4 35,000 5,000 Total inflows $ 85,000 $ 85,000 Without making any calculations, which investment will have the higher net present value? Machine A because there is an increasing trend in cash inflows. The net present values of Machine A and B are the same. Machine B because it generates most of the cash inflows early on. ## M08 - H36 ## The manager of the Paint Division at a local manufacturing company is considering investing in new production equipment. The net present value of the proposal is positive, and the manager believes the new equipment will provide a competitive edge for future years. Even though short-term profits will decrease for the next two years, profits are expected to increase significantly starting in year three. The manager is planning to retire in two years and this investment would prevent her from receiving her annual bonuses for the next two years. As a result, the manager plans to reject the proposal to invest in new production equipment. All of the following company actions would increase the likelihood of the manager accepting the proposal except: establishing policies that require independent teams to review proposals for new investments in equipment. providing short-term bonuses that adjust for the negative effects of new investments in equipment. establishing policies that require new equipment to have a positive impact on profit for the first two years after being purchased. ○ offering stock options in the company.