Posted: July 19th, 2016

What is the payback time?

b. Capital turnover
c. ROI

2. Comment on the differences in ROI among the business segments. Include reasons for the differences.

11-B4
The general manager of a West Virginia mining company has a chance to purchase a new drill at a total cost of $250,000. The recovery period is 5 years. Additional annual pretax cash inflow from operations is $82,000, the economic life of the drill is 5 years, there is no salvage value, the income tax rate is 35%, and the after-tax required rate of return is 16%.

1. Compute the NPV, assuming MACRS depreciation for tax purposes. Should the company acquire the drill?
2. Suppose the economic life of the drill is 6 years, which means that there will be an $82,000 cash inflow from operations in the sixth year. The recovery period is still 5 years. Should the company acquire the drill? Show computations.

11-48
The Jackson City parks department is considering the purchase of a new, more efficient pool heater for its Moorcroft Swimming Pool at a cost of $15,000. It should save $3,000 in cash operating costs per year. Its estimated useful life is 8 years, and it will have zero disposal value. Ignore taxes.

1. What is the payback time?
2. Compute the NPV if the minimum rate of return desired is 8%. Should the department buy the heater? Why?
3. Using the ARR model, compute the rate of return on the initial investment.