Port Pharmacy is considering the purchase of a copying machine, which it will ma
ID: 2578729 • Letter: P
Question
Port Pharmacy is considering the purchase of a copying machine, which it will make available to customers at a percopy charge. The copying machine has an initial cost of $8,500, an estimated useful life of five years, and an estimated salvage value of $2,500. The estimated annual revenue and expenses relating to operation of the machine are as follows:
Revenue...................................................................................................................... $9,000
Expenses other than depreciation................................................................................... $5,500
All revenue will be received in cash; expenses other than depreciation will be paid in cash. Depreciation will be computed by the straightline method.
Compute for this proposal the expected:
a Annual increase in Port’s net income: $____________
a Annual net cash flow: $____________
b Payback period: ____________ years
c Return on average investment: ___________ %
d Net present value (round to the nearest dollar) of the proposed investment, discounted at an annual rate of 15% (Tables show that the present value of $1 to be received in five periods, discounted at 15%, is 0.497 and that the present value of a fiveyear annuity of $1, discounted at 15%, is 3.352): $____________
Explanation / Answer
cost of investment
8500
1-
revenue
9000
Less expenses other than depreciation
5500
less depreciation
1200
net income
4300
2-
Annual net cash flow
net income+ annual depreciation
3500+1200
4700
3-
pay back period in years
initial investment/annual net cash flow
8500/4700
1.808511
4-
return on average investment
average net income/average investment
4300/ 5500
78.18%
average investment = (purchase cost-scrap value)/2 + scrap value
(8500-2500)/2 + 2500
5-
year
net cash flow
present value of net cash flow = cash flow/(1+r)6n r= 15%
0
-8500
-8500
1
4700
4086.957
2
4700
3553.875
3
4700
3090.326
4
4700
2687.24
5
4700
2336.731
5
2500
1242.942
Net present value
sum of present value of net cash flow
8498.071
cost of investment
8500
1-
revenue
9000
Less expenses other than depreciation
5500
less depreciation
1200
net income
4300
2-
Annual net cash flow
net income+ annual depreciation
3500+1200
4700
3-
pay back period in years
initial investment/annual net cash flow
8500/4700
1.808511
4-
return on average investment
average net income/average investment
4300/ 5500
78.18%
average investment = (purchase cost-scrap value)/2 + scrap value
(8500-2500)/2 + 2500
5-
year
net cash flow
present value of net cash flow = cash flow/(1+r)6n r= 15%
0
-8500
-8500
1
4700
4086.957
2
4700
3553.875
3
4700
3090.326
4
4700
2687.24
5
4700
2336.731
5
2500
1242.942
Net present value
sum of present value of net cash flow
8498.071