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Calculating ARR (average accounting return) for new manufacturing plant

You re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installment cost of $12 million, which will be depreciated straight line to zero over its four year life. If the plant has projected net income of $1,627,000, $1,512,000, $1,101,000, and $1,313,000 over these four years, what is the project s average accounting return (AAR)?

Comparing investment criteria: payback, NPV, IRR, profitability index

Consider the following two mutually exclusive projects:

Whichever project you choose, if any, you require a 15% return on your investment.

a) If you apply the payback criterion, which investment will you choose? Why?
b) If you apply the NPV criterion, which investment will you choose? Why?
c) If you apply the IRR criterion, which investment will you choose? Why?
d) If you apply the profitability index criterion, investment will you choose? Why?
e) Based on your answers in (a) through (d), which project will you finally choose? Why?

Speedy Racer Corp. currently sells 18,000 motor homes per year at $40,000 each, and 6,000 luxury motor coaches per year at $55,000 each. The company wants to introduce a new portable camper to fill out its project line; it hopes to sell 12,000 of these campers per year at $10,000 each. An independent consultant has determined that if Speedy Racer introduces the new campers, it should boost sales of its existing motor homes by 5,000 units per year, and reduce the sales of its motor coaches by 2,000 units per year. What is the amount to use as the annual sales figure when evaluating this project? Why?

Pappy s Potato has come pu with a new product, the Pet Potato (they are freeze dried to last longer). Pappy s paid $120,000 for a marketing survey to determine the viability of the product. It is felt that Pet Potato will generate sales of $270,000 per year. The fixed costs associated with this will be $115,000 per year, and variable costs will amount to 30 percent of sales. The equipment necessary for production of the Potato Pets will cost $200,000 and will be depreciated in a straight line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). This is the only initial cost for the production. Pappy s is in a 40% tax bracket and has a required return of 9%. Calculate the payback period, NPV, and IRR.

Kurt s Auto Shop Analysis of Cost Cutting Proposals: should he buy the machine press?

Cost Cutting Proposals. Kurt s Auto Shop is considering a four year project to improve its production efficiency. Buying a new machine press for $450,000 is estimated to result in $195,000 in annual pretax cost savings. The press falls in the MACRS five year class, and it will have a salvage value at the end of the project of $90,000. The press also requires an initial investment in spare parts inventory of $18,000, along with an additional $3,000 in inventory for each succeeding year of the project. If the shop s tax rate is 34% and its discount rate is 15%, should Kurt s buy and install the machine press?