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1. Kathy Myers frequently purchases stocks and bonds, but she is uncertain how t
1. Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate of return she is earning. For example, three years ago she paid $23,000 for 500 shares of Malti Company’s common stock. She received a cash dividend of $460 on the stock at the end of each year for three years. At the end of three years, she sold the stock for $30,000. Kathy would like to earn a return of at least 13% on all of her investments. She is not sure whether the Malti Company stock provides a 13% return and would like some help with the necessary computations.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.
Required:
Compute the net present value Kathy earned on her investment in Malti Company stock.
Did the Malti Company stock provide a 13% return?
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2. Mitsui Electronics, Limited, is considering buying a labor-saving pierce of equipment and provided the following data:
Purchase cost of the equipment$ 560,500
Annual cost savings that will be provided by the equipment$ 95,000
Life of the equipment10years
Required:
1a. Compute the payback period for the equipment.
1b. If the company requires a payback period of four years or less, would it buy the equipment?
2a. Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipment’s useful life.
2b. Would the company buy the equipment if its required rate of return is 16%?
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3. Henrie’s Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $105,510, including freight and installation. Henrie’s estimated the new machine would increase the company’s cash inflows, net of expenses, by $30,000 per year. The machine would have a five-year useful life and no salvage value.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using table.
Required:
What is the machine’s internal rate of return?Note: Round your answer to the nearest whole percentage, i.e. 0.123 should be considered as 12%.
Using a discount rate of 13%, what is the machine’s net present value? Interpret your results.
Suppose the new machine would increase the company’s annual cash inflows, net of expenses, by only $25,735 per year. Under these conditions, what is the internal rate of return?Note: Round your answer to the nearest whole percentage, i.e. 0.123 should be considered as 12%.
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4. Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division’s return on investment (ROI), which has exceeded 22% each of the last three years. He computed the following cost and revenue estimates for each product:
Product AProduct B
Initial investment:
Cost of equipment (zero salvage value)$ 350,000$ 550,000
Annual revenues and costs:
Sales revenues$ 390,000$ 470,000
Variable expenses$ 178,000$ 210,000
Depreciation expense$ 70,000$ 110,000
Fixed out-of-pocket operating costs$ 87,000$ 67,000
The company’s discount rate is 20%.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Calculate each product’s payback period.
2. Calculate each product’s net present value.
3. Calculate each product’s internal rate of return.
4. Calculate each product’s profitability index.
5. Calculate each product’s simple rate of return.
6a. For each measure, identify whether Product A or Product B is preferred.
6b. Based on the simple rate of return, which of the two products should Lou’s division accept?
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