Payback a n d ARR

E a ch of the following scenario sis in dependent. All ca sh flows are after-tax ca s h flow s .
Required:
1 . Brad Blaylock has purchased a tractor for $ 9 3 ,7 5 0 . He expects to receive a n e t ca s h flow o f
$ 3 1 ,2 5 0 p e r ye a r fro m th e in ve s tme n t. W h a t is th e p a yb a ck p e rio d fo r Jim?
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ye a rs

2 . Berth a Lafferty invested $ 3 6 0 ,0 0 0 in a la u n d ro ma t. Th e fa cility h a s a 1 0 -ye a r life e xp e cta n cy w ith
n o e xp e cte d s a lva g e va lu e . Th e la u n d ro ma t w ill p ro d u ce a n e t ca s h flo w o f $ 1 0 8 ,0 0 0 p e r ye a r. W h a t
is th e a cco u n tin g ra te o f re tu rn ? E n te r yo u r a n s w e r a s a w h o le p e rce n ta g e va lu e (fo r e xa mp le ,1 6 %
s h o u ld b e e n te re d a s ” 1 6 ” in th e a n s w e r b o x).
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3 . Me la n n ie Ba yle s s h a s p u rch a s e d a b u s in e s s b u ild in g fo r $ 3 3 6 ,0 0 0 . Sh e e xp e cts to re ce ive th e
fo llo w in g ca s h flo w s o ve r a 1 0 -ye a r p e rio d :

W h a t is th e p a yb a ck p e rio d fo r Me la n n ie ? Ro u n d yo u r a n s w e r to o n e d e cima l p la ce .
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ye a rs

W h a t is th e a cco u n tin g ra te o f re tu rn ? E n te r yo u r a n s w e r a s a w h o le p e rce n ta g e va lu e (fo r
e xa mp le ,1 6 % s h o u ld b e e n te re d a s ” 1 6 ” in th e a n s w e r b o x).
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2.
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Exercise 1 9 .9
NP V a n d IRR
E a ch o f th e fo llo w in g s ce n a rio s is in d e p e n d e n t. All ca s h flo w s a re a fte r-ta x ca s h flo w s .
Th e p re s e n t va lu e ta b le s p ro vid e d in E xh ib it 1 9 B.1 a n d E xh ib it 1 9 B.2 mu s t b e u s e d to s o lve th e
fo llo w in g p ro b le ms .
Required:
1 . P a tz C o rp o ra tio n is co n s id e rin g th e p u rch a s e o f a co mp u te r-a id e d ma n u fa ctu rin g s ys te m. Th e ca s h

b e n e fits w ill b e $ 8 0 0 ,0 0 0 p e r ye a r. Th e s ys te m co s ts $ 4 ,0 0 0 ,0 0 0 a n d w ill la s t e ig h t ye a rs . C o mp u te
th e NP V a s s u min g a d is co u n t ra te o f 1 0 p e rce n t.
$

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Sh o u ld th e co mp a n y b u y th e n e w s ys te m?
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2 . Ste rlin g W e tz e l h a s ju s t in ve s te d $ 2 7 0 ,0 0 0 in a re s ta u ra n t s p e cia liz in g in Ge rma n fo o d . He e xp e cts
to re ce ive $ 4 3 ,4 7 0 p e r ye a r fo r th e n e xt e ig h t ye a rs . His co s t o f ca p ita l is 5 .5 p e rce n t. C o mp u te th e
in te rn a l ra te o f re tu rn . E n te r yo u r a n s w e r a s a w h o le p e rce n ta g e va lu e (fo r e xa mp le ,1 6 % s h o u ld b e
e n te re d a s ” 1 6 ” in th e a n s w e r b o x).
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Did Ste rlin g ma ke a g o o d d e cis io n ?
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Problem 1 9 .2 9
Re p la ce me n t De cis io n , C o mp u tin g Afte r-Ta x C a s h Flo w s , Ba s ic NP V An a lys is
O kmu lg e e Ho s p ita l (a la rg e me tro p o lita n fo r-p ro fit h o s p ita l) is co n s id e rin g re p la cin g its MRI e q u ip me n t
w ith a n e w mo d e l ma n u fa ctu re d b y a d iffe re n t co mp a n y. Th e o ld MRI e q u ip me n t w a s a cq u ire d th re e
ye a rs a g o , h a s a re ma in in g life o f five ye a rs , a n d w ill h a ve a s a lva g e va lu e o f $ 1 0 0 ,0 0 0 . Th e b o o k
va lu e is $ 2 ,0 0 0 ,0 0 0 . Stra ig h t-lin e d e p re cia tio n w ith a h a lf-ye a r co n ve n tio n is b e in g u s e d fo r ta x
p u rp o s e s . Th e ca s h o p e ra tin g co s ts o f th e e xis tin g MRI e q u ip me n t to ta l $ 1 ,0 0 0 ,0 0 0 p e r ye a r.
Th e n e w MRI e q u ip me n t h a s a n in itia l co s t o f $ 5 ,0 0 0 ,0 0 0 a n d w ill h a ve ca s h o p e ra tin g co s ts o f
$ 5 0 0 ,0 0 0 p e r ye a r. Th e n e w MRI w ill h a ve a life o f five ye a rs a n d a s a lva g e va lu e o f $ 1 ,0 0 0 ,0 0 0 a t th e
e n d o f th e fifth ye a r. MAC RS d e p re cia tio n w ill b e u s e d fo r ta x p u rp o s e s . If th e n e w MRI e q u ip me n t is
p u rch a s e d , th e o ld o n e w ill b e s o ld fo r $ 5 0 0 ,0 0 0 . Th e co mp a n y n e e d s to d e cid e w h e th e r to ke e p th e
o ld MRI e q u ip me n t o r b u y th e n e w o n e . Th e co s t o f ca p ita l is 1 2 p e rce n t. Th e co mb in e d fe d e ra l a n d
s ta te ta x ra te is 4 0 p e rce n t.
Yo u mu s t u s e th e E xh ib it 1 9 B.1 a n d E xh ib it 1 9 B.2 p re s e n t va lu e ta b le s a n d E xh ib it 1 9 .5 to s o lve th e
fo llo w in g p ro b le m.
Required:
C o mp u te th e NP V o f e a ch a lte rn a tive . W h e n re q u ire d , ro u n d in te rme d ia te ca lcu la tio n s to th e n e a re s t
d o lla r. If th e NP V is n e g a tive , e n te r yo u r a n s w e r a s a n e g a tive va lu e .
O ld MRI e q u ip me n t

$

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Ne w MRI

$

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e q u ip me n t

Sh o u ld th e co mp a n y ke e p th e o ld MRI e q u ip me n t o r b u y th e n e w o n e ?