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Acctg 16B Assgn 2

The document discusses two exercises: 1) The first exercise calculates the simple rate of return of purchasing a new automated bottling machine for $80,000 that would save $23,000 per year in operating costs compared to their current machine. The simple rate of return is calculated to be 20%. 2) The second exercise calculates the present value of investing a lump sum now to have $400,000 available in 3 years for a new garage. At an 8% interest rate, the present value is $317,600, and at a 12% interest rate, the present value is $284,800.

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1K views2 pages

Acctg 16B Assgn 2

The document discusses two exercises: 1) The first exercise calculates the simple rate of return of purchasing a new automated bottling machine for $80,000 that would save $23,000 per year in operating costs compared to their current machine. The simple rate of return is calculated to be 20%. 2) The second exercise calculates the present value of investing a lump sum now to have $400,000 available in 3 years for a new garage. At an 8% interest rate, the present value is $317,600, and at a 12% interest rate, the present value is $284,800.

Uploaded by

Bryan Lluisma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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BRYAN T.

LLUISMA ACCTG 16B


BSA-4 SAT 6-9PM

Exercise 1 (Simple Rate of Return Method)


The management of Wallingford MicroBrew is considering the purchase of an
automated bottling machine for $80,000. The machine would replace an old piece
of equipment that costs $33,000 per year to operate. The new machine would cost
$10,000 per year to operate. The old machine currently in use could be sold now
for a scrap value of $5,000. The new machine would have a useful life of 10 years
with no salvage value.
Required:
Compute the simple rate of return on the new automated bottling machine.

Operating cost of old machine..................................................... P33,000


Less operating cost of new machine............................................ 10,000
Less annual depreciation on the new machine (P80,000
÷ 10 years) ............................................................................... 8,000
Annual incremental net operating income................................... P15,000
Cost of the new machine ............................................................. P80,000
Less scrap value of old machine.................................................. 5,000
Initial investment......................................................................... P75,000

Simple rate of return = Annual incremental net operating income


Initial Investment

= P15, 000 = 20%


P 75, 000
Exercise 2 (Basic Present Value Concepts)

Amano Freightlines plans to build a new garage in three years to have more
space for repairing its trucks. The garage will cost $400,000. What lump-sum
amount should the company invest now to have the $400,000 available at the end
of the three-year period? Assume that the company can invest money at:
a. Eight percent
b. Twelve percent

1.
a) The present value factor of 8% for three periods is 0.794

a. P400,000 × 0.794 = P317,600

b) The present value factor of 12% for three periods is 0.712

b. P400,000 × 0.712 = P284,800.

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