Concept explainers
A potential investment has a cost of $542,500 and a useful life of 7 years. Annual cash sales from the investment are expected to be $225,225 and annual cash operating expenses are expected to be $88,725. The expected salvage value at the end of the investment's life is $70,000. The company uses straight-line
The company has a before-tax discount rate of 17%, an after-tax discount rate of 14%, and a tax rate of 40%.
1. Assume the company wants to consider this investment before-tax. (Round dollar amounts to the nearest whole dollar and
2. Assume the company wants to consider this investment after-tax. (Round dollar amounts to the nearest whole dollar and IRR to one decimal place (i.e. .055 = 5.5%). Enter negative amounts with a minus sign.)
Trending nowThis is a popular solution!
Step by stepSolved in 2 steps
- Scholastic Co. is evaluating a machine with an initial cost of $450,000 and a five-year life that costs $85,000 per year to operate (assume sales = $0). The firm uses straight-line depreciation; the applicable discount rate is 9%. The machine will have a salvage value of $100,000 at the end of the project's life. The firm has a tax rate of 21%. Note: do not include the salvage value when calculating the annual depreciation expense. Calculate the operating cash flow in year 1. (Enter a negative value)arrow_forwardSheridan Company is considering a capital investment of $183,600 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $10,557 and $51,000, respectively. Sheridan has a 12% cost of capital rate, which is the required rate of return on the investment. Click here to view the factor table. (a) Compute the cash payback period. (Round answer to 1 decimal place, e.g. 10.5.) Cash payback period Compute the annual rate of return on the proposed capital expenditure. (Round answer to 2 decimal places, e.g. 10.52%.) Annual rate of return (b) years Net present value % Using the discounted cash flow technique, compute the net present value. (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round answer for present value…arrow_forwardAn investment of $120,000 with a service life of 12 years is being considered. The expected revenues are provided in the cash flow diagram below. The company would like to perform an after-tax calculation to see if the investment is a good one. The company uses an after tax MARR of 8% and has a tax rate of 45%. The CCA depreciation rate for this type of investment is 20% and there would be a salvage value of $14,400 at the end of the 12 years. 0 i = 8% 35,000 Salvage = 14,400 25,000 Years 8 12 ▼ 120,000 What is the after tax annual worth of the investment? Do you recommend investing?arrow_forward
- Kansas Corporation is reviewing an investment proposal that has an initial cost of $54,000. An estimate of the investment's end-of- year book value, the yearly after-tax net cash inflows, and the yearly net income are presented in the schedule below. Yearly after-tax net cash inflows include savings from the depreciation tax shield. The investment's salvage value at the end of each year is equal to book value, and there will be no salvage value at the end of the investment's life. $35,500 Yearly After-Tax Net cash Inflows Initial Cost and Year 1 Book Value $20,500 2 21,500 18,000 3 11,000 15,500 4 4,000 13,000 5 0 10,500 $77,500 Yearly Net Income $ 3,000 4,000 5,000 6,000 7,000 $25,000 Kansas uses a 12% after-tax target rate of return for new investment proposals. FV of $1 at FV of an ordinary PV of $1 at PV of an ordinary 1123456 Year - 12% annuity at 12% 12% annuity at 12% 1.120 1.000 0.893 0.893 1.254 2.120 0.797 1.690 1.405 3.374 0.712 2.402 1.574 4.779 0.636 3.037 1.762 6.353…arrow_forwardDrake Corporation is reviewing an investment proposal. The initial cost is $105,700. Estimates of the book value of the investment at the end of each year, the net cash flows for each year, and the net income for each year are presented in the schedule below. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the end of each year is assumed to equal its book value. There would be no salvage value at the end of the investment's life. Year 1 2 3 4 Investment Proposal Book Value $70,500 42,400 20,600 6,800 Annual Annual Cash Flows Net Income $9,700 11.100, $44,900 39.200 36,000 29,100 25,205 14,200 15,300 18,405 Drake Corporation uses an 11% target rate of return for new investment proposals. Click here to view the factor table. SUarrow_forwardNikularrow_forward
- Vaughn Company is considering a capital investment of $378,400 in additional productive facilities. The new machinery is expected to have a useful life of 6 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $18,920 and $86,000, respectively. Vaughn has an 7% cost of capital rate, which is the required rate of return on the investment. (a1) Your answer is correct. Compute the cash payback period. (Round answer to 2 decimal places, e.g. 2.25.) Cash payback period eTextbook and Media (a2) 4.4 Annual rate of return years Compute the annual rate of return on the proposed capital expenditure. (Round answer to 2 decimal places, e.g. 2.25%.) Attempts: 1 of 5 used %arrow_forwardVilas Company is considering a capital investment of $202,400 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $11,638 and $46,000, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment. Click here to view the factor table. (a) Compute the cash payback period. (Round answer to 1 decimal place, e.g. 10.5.) Cash payback period Annual rate of return Compute the annual rate of return on the proposed capital expenditure. (Round answer to 2 decimal places, e.g. 10.52%.) (b) 4.4 Net present value 5.75 years Using the discounted cash flow technique, compute the net present value. (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round answer for present…arrow_forwardVaughn Company is considering a capital investment of $378,400 in additional productive facilities. The new machinery is expected to have a useful life of 6 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $18,920 and $86,000, respectively. Vaughn has an 7% cost of capital rate, which is the required rate of return on the investment. (a1) Compute the cash payback period. (Round answer to 2 decimal places, e.g. 2.25.) Your answer is correct. Cash payback period (a2) eTextbook and Media (b) Your answer is correct. Annual rate of return Compute the annual rate of return on the proposed capital expenditure. (Round answer to 2 decimal places, e.g. 2.25%.) eTextbook and Media Your answer is correct. 4.4 years Net present value $ 10 % Attempts: 1 of 5 used Using the discounted cash flow technique, compute the net present value. (Round present value factor calculations to…arrow_forward
- Consider an asset that costs $700,000 and is depreciated straight-line to zero over its seven-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $151,000. If the relevant tax rate is 23 percent, what is the aftertax cash flow from the sale of this asset? Aftertax salvage value=arrow_forwardTo open a new store, Zachary Tire Company plans to invest $378,000 in equipment expected to have a seven-year useful life and no salvage value. Zachary expects the new store to generate annual cash revenues of $322,000 and to incur annual cash operating expenses of $192,000. Zachary's average income tax rate is 40 percent. The company uses straight-line depreciation. Required Determine the expected annual net cash inflow from operations for each of the first four years after Zachary opens the new store. Note: Negative amounts should be indicated by a minus sign. Year 1 Year 2 Year 3 Year 4 Net cash Inflow or Outflowarrow_forwardA firm is evaluating an investment proposal to instal new milling machines. The project requires an initial investment of R 50000. The equipment has a lifespan of 5 years and no salvage value. The company operates under a tax rate of 55% and utilizes straight line depreciation. The estimated annual profits before depreciation from the investment are as follows: Year 1: 10000, Year 2: 11000, Year 3: 14000, Year 5: 15000 and year 5 R 25000. Compute the payback period and the Net Present Value at 10% discount rate, profit after tax for each year and the cash inflow for each year.arrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education