CHAPTER 11
Capital Budgeting
11-A1 (15-25 min.) Answers are printed in the text at the end of the assignment material.
11-29 (10-15 min.)
1. The present value is $480,000 and the annual payments are an annuity, requiring
use of Table 2:
(a)$480,000 = annual payment × 11.2578
annual payment = $480,000 ÷ 11.2578 = $42,637
(b)$480,000 = annual payment × 9.4269
annual payment = $480,000 ÷ 9.4269 = $50,918
(c)$480,000 = annual payment × 8.0552
annual payment = $480,000 ÷ 8.0552 =$59,589
2. (a)$480,000 = annual payment × 8.5595
annual payment = $480,000 ÷ 8.5595 = $56,078
(b)$480,000 = annual payment × 7.6061
annual payment = $480,000 ÷ 7.6061 = $63,107
(c)$480,000 = annual payment × 6.8109
annual payment = $480,000 ÷ 6.8109 =$70,475
3. (a) Total payments= 30 × $50,918 = $1,527,540
Total interest paid= $1,527,540- $480,000 = $1,047,540
(b) Total payments= 15 × $63,107= $946,605
Total interest paid = $946,605 - $480,000 = $466,605
11-36 (10 min.)
Buy. The net present value is positive.
Initial outlay * $(21,000)
Present value of cash operating savings, from
12-year, 12% column of Table 2, 6.1944 × $5,000 30,972
Net present value $ 9,972
* The trade-in allowance really consists of a $5,000 adjustment of the selling
price and a bona fide $10,000 cash allowance for the old equipment. The
relevant amount is the incremental cash outlay, $21,000. The book value is
irrelevant.
11-39 (10-15 min.)
Copyright ©2011 Pearson Education 1
Copyright ©2011 Pearson Education
2
1. NPV @ 10% = 10,000 × 3.7908 = $37,908 - $36,048 = $1,860 NPV @ 12% = 10,000 × 3.6048 = $36,048 - $36,048 = $0
NPV @ 14% = 10,000 × 3.4331 = $34,331 - $36,048 = $(1,717)
2.
The IRR is the interest rate at which NPV = $0; therefore, from requirement 1 we know that IRR = 12%.
3.
The NPV at the company’s cost of capital, 10%, is positive, so the project should be accepted.
4.
The IRR (12%) is greater than the company’s cost of capital (10%), so the project should be accepted. Note that the IRR and NPV models give the same decision.
11-46 (10-15 min.)
Annual addition to profit = 40% × $25,000 = $10,000.
1.
Payback period is $36,000 ÷ $10,000 = 3.6 years. It is not a good measure of profitability because it ignores returns beyond the payback period and it does not account for the time value of money.
2. NPV = $5,114. Accept the proposal because NPV is positive. Computation: NPV = ($10,000 × 4.1114) - $36,000
= $41,114 - $36,000 = $ 5,114
3. ARR = (Increase in average cash flow – Increase in depreciation) ÷ Initial
investment
= ($10,000 - $6,000) ÷ $36,000 = 11.1%
11-51 (30-35 min.)
1.
Annual Operating Cash Flows
Xerox
Cannon Difference Salaries $49,920(a) $41,600(b) $ 8,320 Overtime 1,728(c) -- 1,728 Repairs and maintenance 1,800 1,050 750
Toner, supplies, etc. 3,600
3,300 300 Total annual cash outflows $57,048 $45,950 $11,098
(a) ($ 8 × 40 hrs.) × 52 weeks × 3 employees = $320 × 52 × 3 = $49,920 (b) ($10 × 40 hrs.) × 52 weeks × 2 employees = $400 × 52 × 2 = $41,600 (c) ($12 × 4 hrs.) × 12 months × 3 machines = $ 48 × 12 × 3 = $ 1,728
Initial Cash Flows
Xerox
Cannon Difference Purchase of Cannon machines $ -- $50,000 $50,000
