Scuba Supply Company

Question 1

Scuba Supply Company is considering making an investment of $1,000,000 and estimates that the result of the investment will yield the following returns over the next five years:

Year 1

($500,000) – a loss

Year 2

$200,000

Year 3

$610,000

Year 4

$740,000

Year 5

$800,000

Estimate the internal rate of return on this investment.

All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations. For problems, be sure to answer all questions and provide all requested information.

Question 2

How does cash flow affect the evaluation of an investment? If an initial investment will be $100,000, which is better, a one-time return of $120,000 received in one year after the investment is made, or a return of $10,000 every month for that one year?

Question 3

ABC Company is considering an investment in a machine that will have a useful life of six years with a salvage value at the end of $12,000. Assuming that ABC has a minimum rate of return of 12%, what is the present value of that salvage value?

Question 4

What are the differences in the focus of planning an operating budget and a capital budget? What different factors must be considered in each kind of budget?

Your response should be at least 200 words in length. All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations. For problems, be sure to answer all questions and provide all requested information.

Question 5

Brass Knuckle Company wants to buy a new machine which will not increase its revenues, but that will reduce its costs by $10,000 per year. The machine will cost $60,000 and will have a useful life of nine years. At the end of the machine’s useful life, it will have no salvage value. Brass Knuckle wants an 11% rate of return. Ignoring the effects of taxes, calculate the net present value of the investment. Should Brass Knuckle make this investment?