This document provides examples and instructions for calculating financial metrics like net present value, internal rate of return, payback period and profitability index for capital investment projects. It includes 182 examples of companies considering various equipment purchases and facility investments, and calculating the expected cash flows and returns to evaluate whether the projects should be accepted. The examples cover a range of capital costs, estimated lives, salvage values, cash inflows and outflows, and required rates of return.

1. Suny Brockportcns ACC 202 Chapter 12
Part 2
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ACC 202 CHAPTER 12 PLANNINGFOR CAPITALINVESTMENTS PART2
Ex. 171
Mimi Companyisconsideringacapital investmentof $275,000 in new equipment.The equipmentis
expectedtohave a5-year useful lifewithnosalvage value.Depreciationiscomputedbythe straight-line
method. Duringthe life of the investment,annual netincomeandcashinflowsare expectedtobe
$25,000 and$80,000, respectively.Mimi'sminimumrequiredrate of returnis10%. The presentvalue of
1 for5 periodsat10% is .621 and the presentvalue of an annuityof 1 for5 periodsat10% is3.791.
Instructions
Compute eachof the following:
(a) cash paybackperiod.
(b) netpresentvalue.
(c) annual rate of return.
Ex. 172
SavannaCompanyisconsideringtwocapital investmentproposals.Relevantdataoneachprojectare as
follows:

2. ProjectRed ProjectBlue
Capital investment $440,000 $640,000
Annual netincome 25,000 60,000
Estimateduseful life 8 years 8 years
Depreciationiscomputedbythe straight-line methodwithnosalvage value.Savannarequiresan8%
rate of returnon all newinvestments.The presentvalue of 1for 8 periodsat8% is .540 and the present
value of an annuityof 1 for8 periodsis5.747.
Instructions
(a) Compute the cashpayback periodforeachproject.
(b) Compute the netpresent value foreachproject.
(c) Compute the annual rate of returnforeach project.
(d) WhichprojectshouldSavannaselect?
Ex. 173
Yappy Companyisconsideringacapital investmentof $320,000 in additional equipment.The new
equipmentisexpectedtohave a useful life of 8yearswithno salvage value. Depreciationiscomputed
by the straight-linemethod. Duringthe life of the investment,annual netincomeandcashinflowsare
expectedtobe $22,000 and $62,000, respectively.Yappyrequiresa10% returnon all new investments.
PresentValue of anAnnuityof 1
Period 8% 9% 10% 11% 12% 15%
8 5.747 5.535 5.335 5.146 4.968 4.487
Instructions
(a) Compute eachof the following:
1. Cash paybackperiod.

3. 2. Netpresentvalue.
3. Profitability index.
4 Internal rate of return.
5. Annual rate of return.
(b) Indicate whetherthe investmentshouldbe acceptedorrejected.
Ex. 174
Laramie Service Centerjustpurchasedanautomobilehoistfor$16,900. The hoisthas a 5-year life and
an estimatedsalvage value of $1,250. Installationcostswere $3,770, and freightchargeswere $960.
Laramie usesstraight-line depreciation.
The newhoistwill be usedtoreplace mufflersandtiresonautomobiles.Laramie estimatesthatthe new
hoistwill enablehismechanicstoreplace fourextramufflersperweek.Eachmufflersellsfor$85
installed.The costof a muffleris$46, and the laborcost to install amuffleris$13.
Instructions
(a) Compute the paybackperiodforthe new hoist.
(b) Compute the annual rate of returnforthe new hoist.(Roundtoone decimal.)
Ex. 175
Sophie’sPetShopisconsideringthe purchase of anew deliveryvan.Sophie Smith,ownerof the shop,
has compiledthe followingestimatesintryingtodeterminewhetherthe deliveryvanshould be
purchased:
Cost of the van $35,000
Annual netcash flows 6,000
Salvage value 4,000
Estimateduseful life 8 years
Cost of capital 10%
Presentvalue of anannuityof 1 5.335

4. Presentvalue of 1 .467
Sophie'sassistantmanageristryingto convince Sophie thatthe vanhas otherbenefitsthatshe hasn't
consideredinthe initialestimates.These additional benefits,includingthe free advertisingthe store's
name paintedonthe van's doorswill provide,are expectedtoincrease netcashflows by$500 each
year.
Instructions
(a) Calculate the netpresentvalue of the van,basedonthe initial estimates.Shouldthe vanbe
purchased?
(b) Calculate the netpresentvalue,incorporatingthe additional benefitssuggestedbythe assistant
manager.Shouldthe vanbe purchased?
(c) Determine howmuchthe additionalbenefitswouldhave tobe worthinorderfor the van tobe
purchased.
Ex. 176
VistaCompanyisconsideringtwonewprojects,eachrequiringanequipmentinvestmentof $97,000.
Each projectwill lastforthree yearsand produce the followingcashinflows:
Year Cool Hot
1 $ 38,000 $ 42,000
2 43,000 42,000
3 48,000 42,000
$129,000 $126,000
The equipmentwill have nosalvage value atthe endof itsthree-yearlife.VistaCompanyusesstraight-
line depreciationandrequiresaminimumrate of returnof 12%.
Presentvalue dataare as follows:

5. PresentValue of 1 PresentValue of anAnnuityof 1
Period 12% Period 12%
1 .893 1 .893
2 .797 2 1.690
3 .712 3 2.402
Instructions
(a) Compute the netpresentvalue of eachproject.
(b) Compute the profitabilityindexof eachproject.
(c) Whichprojectshouldbe selected? Why?
Ex. 177
KSU Corp. isconsideringpurchasingone of twonew diagnosticmachines. Eithermachine wouldmake it
possible forthe companytobidon jobsthat itcurrentlyisn'tequippedtodo.Estimatesregardingeach
machine are providedbelow.
Machine A Machine B
Original cost $106,000 $ 175,000
Estimatedlife 8 years 8 years
Salvage value -0- -0-
Estimatedannual cashinflows $30,000 $45,000
Estimatedannual cashoutflows$10,000 $15,000
Instructions

6. Calculate the netpresentvalue andprofitabilityindex of eachmachine.Assume a9% discountrate.
Whichmachine shouldbe purchased?
Ex. 178
SantanaCompanyis consideringinvestinginaprojectthatwill cost$151,000 and have no salvage value
at the endof its5-year life.Itisestimatedthatthe projectwill generate annual cashinflowsof $40,000
each year.The companyrequiresa9% rate of returnand usesthe followingcompoundinteresttable:
PresentValue of anAnnuityof 1
Period 6% 8% 9% 10% 11% 12%
15%
5 4.212 3.993 3.890 3.791 3.696 3.605 3.352
Instructions
(a) Compute (1) the netpresentvalue and(2) the profitabilityindexof the project.
(b) Compute the internal rate of returnonthis project.
(c) ShouldSantanainvestinthisproject?
Ex. 179
JohnsonCompanyisconsideringpurchasingone of twonew machines.The followingestimatesare
available foreachmachine:
Machine 1 Machine 2
Initial cost $152,000 $169,000
Annual cashinflows 50,000 60,000

7. Annual cashoutflows 15,000 20,000
Estimateduseful life 6 years 6 years
The company's minimumrequiredrate of returnis9%.
PresentValue of an Annuityof 1
Period 8% 9% 10% 11% 12% 15%
6 4.623 4.486 4.355 4.231 4.111 3.784
Instructions
(a) Compute the (1) netpresentvalue,(2) profitabilityindex,and(3) internal rate of returnforeach
machine.
(b) Whichmachine shouldbe purchased?
Ex. 180
PlatoonCompanyisperformingapost-auditof aprojectthat wasestimatedtocost$420,000, have a
useful lifeof 6 yearswitha zerosalvage value,andresultinnetcashinflowsof $100,000 per year.After
the investmentwasin operationforayear,revisedfiguresindicate thatitactuallycost$470,000, will
have a 9-year useful life,andwillproduce netcashinflowsof $77,000. The presentvalue of anannuity
of 1 for 6 yearsat 10% is4.355 and for9 yearsis 5.759.
Instructions
Determine whetherthe projectshouldhave beenacceptedbasedon(a) the original estimatesandthen
on (b) the actual amounts.
Ex. 181
ShillingCorp.isthinkingaboutopeningabaseball campinFlorida.Inorderto start the camp, the
companywouldneedtopurchase land,buildfive baseball fields,andadormitory-type sleepingand
diningfacilitytohouse 100 players.Eachyear the camp wouldbe runfor 10 sessionsof 1 weekeach.

8. The company wouldhire collegebaseball playersascoaches.The campattendeeswouldbe baseball
playersage 12-18. PropertyvaluesinFloridahave enjoyedasteadyincrease invalue.Itisexpectedthat
afterusingthe facilityfor20 years,Shillingcansell the propertyformore thanit wasoriginally
purchasedfor.The followingamountshave beenestimated:
Cost of land $ 630,000
Cost to builddormanddiningfacility 2,100,000
Annual cashinflowsassuming100playersand10 weeks2,520,000
Annual cashoutflows 2,260,000
Estimateduseful life 20 years
Salvage value 4,400,000
Discountrate 10%
Presentvalue of anannuityof 1 8.514
Presentvalue of 1 .149
Ex. 181 (Cont.)
Instructions
(a) Calculate the netpresentvalue of the project.
(b) To gauge the sensitivityof the projecttothese estimates,assume that if only80 campersattend
each week,revenueswillbe $2,085,000 and expenseswill be $1,865,000. What is the netpresentvalue
usingthese alternative estimates? Discussyourfindings.
(c) Assumingthe original facts,whatisthe netpresentvalue if the projectisactuallyriskierthan
firstassumed,anda 12% discountrate ismore appropriate? The presentvalue of 1 at 12% is.104 and
the presentvalue of anannuityof 1 is7.469.
Ex. 182
Ace Corporationrecentlypurchasedanew machine foritsfactoryoperationsata cost of $950,000. The
investmentisexpectedtogenerate $250,000 inannual cash flowsfora periodof five years.The
requiredrate of returnis8%. The newmachine isexpectedtohave zerosalvage value atthe endof the
five-yearperiod.

9. Instructions
Calculate the internal rate of return.(Table 4from AppendixCisneeded.)
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