Acc301 Essentials of Accounting: Week 6 (E10-5, E10-8, P10-1A, P10-3A)

Acc301 Essentials of Accounting (DeVry Online)
Week 6 Homework
E10-5 Summer Company
E10-8 Morgan Company
P10-1A The Three Stooges Company
P10-3A CarolinaClinic

Summer Company is considering three capital expenditure projects. Relevant data for the projects are as follows.
Project Investment Annual Income Life of Project
22A 240,000 15,000 6 years
23A 270,000 24,400 9 years
24A 280,000 21,000 7 years
Annual income is constant over the life of the project. Each project is expected to have zero salvage value at the end of the project. Summer Company uses the straight-line method of depreciation.

(a) Determine the internal rate of return for each project. Round the internal rate of return factor to three decimals.
(b) If Summer Company's required rate of return is 11%, which projects are

Morgan Company is considering a capital investment of $180,000 in additional productive facilities. The new machinery is expected to have a useful life of 6 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $20,000 and $50,000 respectively. Morgan has a 15% cost of capital rate which is the required rate of return on the investment.

(Round to two decimals.)
(a) Compute (1) the cash payback period and (2) the annual rate of return on the proposed capital expenditure.
(b) Using the discounted cash flow technique, compute the net present value.

The Three Stooges partnership is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.
Project Moe Project Larry Project Curly
Capital investment 150,000 160,000 200,000
Annual net income:
Year 1 13,000 18,000 27,000
Year 2 13,000 17,000 22,000
Year 3 13,000 16,000 21,000
Year 4 13,000 12,000 13,000
Year 5 13,000 9,000 12,000
Total $65,000 $72,000 $95,000
Depreciation is computed by the straight-line method with no salvage value. The company's cost of capital is 15%. (Assume that cash flows occur evenly throughout the year.)

(a) Compute the cash payback period for each project. (Round to two decimals.)
(b) Compute the net present value for each project. (Round to nearest dollar.)
(c) Compute the annual rate of return for each project. (Round to two decimals.) (Hint: Use average annual net income in your computation.)
(d) Rank the projects on each of the foregoing bases. Which project do you recommend?

Carolina Clinic is considering investing in new heart monitoring equipment. It has two options: Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life. The following estimates were made of the cash flows. The company's cost of capital is 11%.
Option A Option B
Initial cost 160,000 227,000
Annual cash inflows 75,000 80,000
Annual cash outflows 35,000 30,000
Cost to rebuild (end of year 4) 60,000 -
Salvage value - 12,000
Estimated useful life 8 years 8 years

(a) Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint: To solve for internal rate of return, experiment with alternative discount rates to arrive at a net present value of zero.)
(b) Which option should be accepted?
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