I need some help for my Accounting homework 1) Magic Corporation, an amusement p
ID: 2497330 • Letter: I
Question
I need some help for my Accounting homework
1) Magic Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $151,949 and have an estimated useful life of 6 years. It will be sold for $67,900 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $26,600. The company’s borrowing rate is 8%. Its cost of capital is 10%. Calculate the net present value
2)Beacon Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $502,344, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $73,600. Project B will cost $334,003, has an expected useful life of 12 years, a salvage value of zero, and is expected to increase net annual cash flows by $50,700. A discount rate of 8% is appropriate for both projects. Compute the net present value and profitability index of each project.
3)Horowitz Company is evaluating the purchase of a rebuilt spot-welding machine to be used in the manufacture of a new product. The machine will cost $178,000, has an estimated useful life of 7 years, a salvage value of zero, and will increase net annual cash flows by $39,003 . What is its approximate internal rate of return?
Explanation / Answer
Answer:
1. Net Present Value; NPV = Present Value of Cash Inflows - Present Values of Cash Outflows
NPV = PV of $ 26,600@10%,6years + PV of $ 67,900@10%,6th year - PV of $ 151,949
(Note: In absence of any information on whether the exibit is purchased out of own funds or borrowed funds, we are ignoring any interest calculation on purchase value of exibit)
NPV = $ 26,600 x 4.3552 + $ 67,900 x 0.5644 - $ 151,949 = $ 154,171.08 - $ 151,949 = $ 2,222.08
2. Calculation of Net Present Value
Project A
NPV = $ 73,600 x PVAF @8% for 12 years - $ 502,344 = $ 73,600 x 7.5360 - $ 502,344 = $ 554,650 - $ 502,344 NPV = $ 52,306
Project B
NPV = $ 50,700 x PVAF @8% for 12 years - $ 334,003 = $ 50,700 x 7.5360 - $ 334,003 = $ 382,075 - $ 334,003 NPV = $ 48,072
Calculation of Profitability Index
Project A
Profitability Index = Present Value of Cash Inflows / Initial Investment
PI = $ 554,650 / $ 502,344 = 1.104
Project B
PI = $ 382,075 / $ 334,003 = 1.1439
3. Calculation of IRR
To calculate IRR let us assume two discounting rates as 15% and 10%
IRR = Lower Rate + [NPVLR / (NPVLR - NPVHR)] (HR - LR)
IRR = 10% + [$ 11,883 / ($ 11,883 - (- $ 15,731)] (15 - 10)
IRR = 10% + 0.43 (15-10) = 12.151%
Therefore, the approximate Internal Rate of return is 12.15%
Note:
NPVLR = NPV at lower rate = $ 39,003 x PVAF@10%,7years - $ 178,000 = $ 189,883 - $ 178,000 = $ 11,883
NPVHR = NPV at higher rate = $ 39,003 x PVAF@15%,7years - $ 178,000 = $ 162,269 - $ 178,000 = $ 15,731