79) Darwin Dental Services is considering purchasing a new dental chair for $727 000. It will

require additional working capital of $63 000. Its anticipated eight-year life will generate

additional client revenue of $303 000 annually with operating costs, excluding

depreciation, of $150 000. At the end of eight years, it will have a salvage value of $59 500

and return $15 000 in working capital. Ignore taxes.

Required:

a. If the company has a required rate of return of 14%, what is the net present value of the

proposed investment?

b. What is the internal rate of return?

79)

80) Botany Bay Fisheries needs a new refrigeration system on their trawler. They have received

three

proposals, with related facts as follows:

Proposal A Proposal B Proposal C

Initial investment in equipment $180 000 $180 000 $180 000

Annual cash increase in

operations:

Year 1 160 000 90 000 180 000

Year 2 20 000 90 000 0

Year 3 90 000 90 000 0

Salvage value 0 0 0

Estimated life 3 yrs 3 yrs 1 yr

The company uses straight-line depreciation for all capital assets.

Required:

a. Calculate the payback period, net present value, and accrual accounting rate of return

with initial investment, for each proposal. Use a required rate of return of 14%.

b. Rank each proposal 1, 2, and 3 using each method separately. Which proposal is best?

80)

26

Why?

 

 

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