References eBook & Resources

Worksheet Difficulty: 2 Medium Learning Objective: 25­A1 Evaluate

short­term managerial decisions using
relevant costs.

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 25. Award: 10.00 points Problems? Adjust credit for all students.

Rory Company has a machine with a book value of $75,000 and a remaining five­year useful life. A new
machine is available at a cost of $112,500, and Rory can also receive $60,000 for trading in its old machine.
The new machine will reduce variable manufacturing costs by $13,000 per year over its five­year useful life.

Calculate the incremental income. (Any losses or outflows should be entered with a minus sign.)

Incremental Income From Replacing Machine

Cost of new machine $ (112,500)
Cash received from trade in of old machine 60,000
Reduction in variable manufacturing costs 65,000

Incremental income (incremental cost) $ 12,500

Should the machine be replaced? Yes

Explanation:

The company should replace the machine as this increases income by $12,500.

References eBook & Resources

Expanded Difficulty: 2 Medium Learning Objective: 25­A1 Evaluate

table short­term managerial decisions using
relevant costs.

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 26. Award: 10.00 points Problems? Adjust credit for all students.

Heels, a shoe manufacturer, is evaluating the costs and benefits of new equipment that would custom fit
each pair of athletic shoes. The customer would have his or her foot scanned by digital computer
equipment; this information would be used to cut the raw materials to provide the customer a perfect fit. The
new equipment costs $90,000 and is expected to generate an additional $35,000 in cash flows for five
years. A bank will make a $90,000 loan to the company at a 10% interest rate for this equipment’s
purchase. Use the following table to determine the break­even time for this equipment. All cash flows occur
at year­end. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables
provided.)

Chart Values are Based on:

i= 10%
Cumulative
Cash Inflow Present Value
Year x PV Factor = Present Value
(Outflow) of Inflow
(Outflow)
+/-0.0001
0 $ (90,000) x = $ (90,000) +/-1 $ (90,000)
1.0000
+/-0.0001
1 35,000 x = 31,819+/-1 (58,181)+/-1
0.9091
2 35,000 x +/-0.0001 = 28,924+/-2 (29,257)+/-2
0.8264
+/-0.0001
3 35,000 x = 26,296 +/-3 (2,961)+/-3
0.7513
4 35,000 x +/-0.0001 = 23,905 +/-4 20,944+/-4
0.6830
+/-0.0001
5 35,000 x = 21,732 +/-5 42,676+/-5
0.6209
$ 42,676 +/-0.1%

Break­even time = 3.1+/-0.1 years

Explanation:

The break­even time point occurs in the 1st month of the 4th year computed as ($2,961 / $23,905) = 0.124
years. Therefore, a reasonable estimate would be approximately 3.1 years [or 3 years, 1 months (0.124 ×
12 months = 1.5 months)].

References eBook & Resources

Expanded table Difficulty: 2 Medium Learning Objective: 25­A2 Analyze a

capital investment project using break­
even time.

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 27. Award: 10.00 points Problems? Adjust credit for all students.

Siemens AG invests €80,000,000 to build a manufacturing plant to build wind turbines. The company
predicts net cash flows of €16,000,000 per year for the next 8 years. Assume the company requires an 8%
rate of return from its investments. (FV of $1, PV of $1, FVA of $1 and PVA of $1). (Use appropriate
factor(s) from the tables provided.)

(1) What is the payback period of this investment?

Payback Period
Choose Numerator: / Choose Denominator: = Payback Period
Cost of investment / Annual net cash flow = Payback period
€ 80,000,000 / € 16,000,000 = 5.00 years

(2) What is the net present value of this investment? (Any losses or outflows should be entered with a
minus sign.)

Chart Values are Based on:

n= 8
i= 8%

Cash Flow Select Chart Amount x PV Factor = Present Value

+/-0.0001 € +/-1
Annual cash flow Present Value of an Annuity of 1 € 16,000,000 x =
5.7466 91,945,600
€ +/-1
Present value of cash inflows
91,945,600
Less: Amount to be invested (80,000,000)+/-1
Net present value € 11,945,600+/-1

Explanation:

No further explanation details are available for this problem.

References eBook & Resources

Worksheet Learning Objective: 25­P1 Learning Objective: 25­P3 Compute net present value and
Compute payback period describe its use.
and describe its use.

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