Agriculture Reference
In-Depth Information
T
able 13.10
Estimated net profi t and depreciation expense for new
sizing equipment
Net Profi t
Year
Before Depreciation (dollars) *
Depreciation (dollars)
1
250,000
80,000
2
225,000
80,000
3
200,000
80,000
4
150,000
80,000
5
135,000
80,000
* Net Profi t here includes only cash infl ows and outfl ows.
Perhaps you can help John by applying some of the decision tools discussed in this chapter
to the decisions he faces.
Perfect Choice has the option of signifi cantly upgrading their plant by adding electronic
sizing and sorting equipment. The cost of this equipment is $400,000, with an expected life
of fi ve years. Equipment of this nature is not expected to have an appreciable salvage. There
will be signifi cant labor savings involved. Initially, the new equipment will require little
maintenance and repair, but as it gets older, the cost of maintenance will go up sharply.
Generally, Perfect Choice's owners and management feel that a 12 percent return should be
expected from any new investment project before it can be undertaken. Expected net returns
before depreciation resulting from the investment and estimated depreciation expenses are
shown in
Table 13.10
.
Questions
1.
Initially, before any calculations, what is your general reaction? Should Perfect Choice
invest in the new equipment?
2.
What is the payback period for this investment?
3.
What is the simple rate of return for this investment?
4.
What is the net present value of this investment, using the 12 percent minimum return
required by the owners?
5.
What are the limitations of each of these approaches?
6.
In the fi nal analysis, do you believe this investment project would be good for Perfect
Choice? Why or why not?
7.
Using a fi nancial calculator or spreadsheet, determine the internal rate of return for the
investment.
