Blue Ridge Furniture is considering the purchase of two different items of equipment as described below:

1. Machine A would permit Blue Ridge to compress sawdust into various shelving products. At present, the sawdust is disposed of as a waste product.The following info is available about the machine:

a) The machine would cost $780,000 and would have a 25% salvage value at the end of its 10 year useful life. The company uses straight line depreciation and considers salvage value in computing depreciation deductions.

b) The shelving products manufactured from the use of machine would generate revenues of $350,000 a year.Variable manufacturing costs would be 20% of sales.

c) Fixed Expenses associated with shelving products would be (per year): advertising $42,000, salaries $86,000, utilities $9,000, insurance $13,000

2. Machine B is used to automate a sanding process that was done by hand. The info is:

a) The new sanding machine would cost $220,000 and would have no salvage value at the end of its 10 year useful life. The company uses straight line depreciation on a new machine.

b) Several old pieces of sanding equipment that are fully depreciated would be disposed of at a salvage value of $7,200

c) The new sanding machine would provide annual savings in cash operating costs.It would require an operator at an annual salary of $26,000 and $3,000 in annual maintenance costs. The current hand operated procedure costs $85,000 per year.

Blue Ridge requires a simple rate of return of 16% on all equipment purchases. Also, the company will not purchase equipment unless the equipment has a payback period of 4 years or less.

Required:

Machine A
a) Contribution format income statement
b) Simple Rate of return
c) Payback period

Machine B
a) Simple rate of return
b) Payback period

According to the company criteria, which machine if either, it should purchase?

Solution Summary

The solution explains the calculation of simple rate of return and payback period in relation to purchase of machine

Yancy is considering a project which will produce cash inflows of $900 a year for 4 years. The project has a 9 percent required rate of return and an initial cost of $2,800. What is the discounted payback period?

14. Given the following cash flows and a cost of capital of 14%, calculate
a. Payback period
b. Net Present Value
c. Internal Rate of Return
d. MIRR.
TIME ATCF
0 -160
1 +200
2 + 45
3 +200
4 +100
5 + 50
Should we undertake this project? Why?

Payback period and rate of return
Transit Shuttle Inc. is considering investing in two new vans that are expected to generate combined cash inflows of $20,000 per year. The van's combined purchase price is $65,000. The expected life and salvage value of each are four years and $15,000, respectively. Transit Shuttle has an ave

Calculate for a company's CFO, key financial metrics for this capital budgeting project. These key metrics must include payback period, net present value, internal rate of return and modified rate of return for a proposed capital budgeting project. Describe what each of these metrics tells us.
Key Financial Data for BCD Com

A project has an initial cost of $8,500 and produces cash inflows of $2,600, $4,900, and $1,500 over the next three years, respectively. What is the discounted payback period if the required rate of return is 7%?
A. 2.13 years
B. 2.33 years
C. 2.67 years
D. 2.91 years
E. Never

Project K costs $52,125, its expected net cash inflows are $12,000 per year for 8 years, and its WACC is 12%.
a) What's the project's NPV?
b) What's the project's IRR?
c) What's the project's MIRR?
d) What's the project's payback?
e) What's the project's discounted payback?

Nucore Company is thinking of purchasing a new candy-wrapping machine at a cost of $370,000. The machine should save the company approximately $70,000 in operating costs per year over its estimated useful life of 10 years. The salvage value at the end of 10 years is expected to be $15,000. (Ignore income tax effects.)
Requi

The shop foreman at Santa Barbara Rig Service proposed a portable service unit requiring an initial outlay of $100,000 and providing the following year-end cash flows:
Year 1 2 3 4 5
Cash flow 30000 -50000 70000 60000 50000
At a 10% required return, find the payback period and

A company is considering two additional mutually exclusive projects. The cash flows associated with these projects are as follows:
YEAR PROJECT A PROJECT B
0 -$100,000 -$100,000
1 32,000 0
2 32,000 0
3 32,000 0
4 32,000 0
5 32,000 $200,000
The required rate of return on these projects is 11 percent.
1. What is each

1. The budget committee has received the following projects. They are mutually exclusive. The Company uses 10% as the rate of return.
Year Project A Project B
0 - 30,000 - 60,000
1 10,000 20,000
2 10,000 20,000
3 10,000 20,000
4 10,000 20,000
5 10,0