Please help. 1. Joshua Company is considering buying a new printing press. The p
ID: 2419199 • Letter: P
Question
Please help.
1. Joshua Company is considering buying a new printing press. The printing press costs $400,000 and will be depreciated (straight-line) over 20 years with no salvage value. The net cash inflows generated by the printing press are expected to be $80,000 each year for 20 years. Using this information, compute the payback period and the unadjusted rate of return for the printing press.
2. Southside Junk Yard needs to buy a car smasher. The machine would add net cash revenues of $175,000 at the end of the first year and $200,000 at the end of the second year (it will only last two years). The initial cost of the machine is $350,000. At the end of two years, the salvage value of the car smasher is estimated to be $50,000. The required rate of return on the car smasher is 15%. What is the net present value of the car smasher machine?
3. Derrald Corporation has raised $120,000 in equity financing through the issuance of shares. Stockholders expect to earn an average of 15 percent per year on their equity investment in Derrald. In addition, the corporation has issued $75,000 of 12 percent bonds. The corporation has also accumulated $105,000 in earnings that have been retained in the company. Investors expect to earn about 18 percent on the earnings that are retained in the company. Using the weighting procedure discussed in the chapter, calculate Derrald Corporation’s cost of capital. (Ignore taxes in calculating the cost of debt.) Round all percentages calculations to two decimal points. (XX.XX%).
4. Lily Company is planning to buy a machine at a cost of $240,000. The machine will generate net cash inflows at the end of each year for the next 5 years of $70,000. At the end of 5 years, the machine will also have a salvage value of $40,000. Lily’s discount rate is 12%. Compute the net present value of the machine.
5. Kamili Company is planning to buy a wind-powered electricity generator at a cost of $300,000. Because the generator is environmentally friendly, the state government will give Kamili a cash incentive payment of $50,000 on the day the generator is purchased. In addition, the generator will create net cash inflows at the end of each year for the next 4 years of $75,000. At the end of 4 years, the generator will have a salvage value of $40,000. Kamilis discount rate is 11%. Compute the net present value of the generator.
4. Lily Company is planning to buy a machine at a cost of $240,000. The machine will generate net cash inflows at the end of each year for the next 5 years of $70,000. At the end of 5 years, the machine will also have a salvage value of $40,000. Lily’s discount rate is 12%. Compute the net present value of the machine.
5. Kamili Company is planning to buy a wind-powered electricity generator at a cost of $300,000. Because the generator is environmentally friendly, the state government will give Kamili a cash incentive payment of $50,000 on the day the generator is purchased. In addition, the generator will create net cash inflows at the end of each year for the next 4 years of $75,000. At the end of 4 years, the generator will have a salvage value of $40,000. Kamilis discount rate is 11%. Compute the net present value of the generator.
Explanation / Answer
1. Payback period = Initial cash outlay/Cash inflows
= $400000/80000
= 5 years
Unadjusted rate of return = 80000/400000 x 100
= 20%
2. NPV = 175000 x 0.870 + 200000 x 0.756 + 50000 x 0.756 - 350000
= - 8750