Stuart Electronics is considering investing in manufacturing equipment expected to cost $350,000. The equipment has an estimated useful life of four years and a salvage value of $22,000. It is expected to produce incremental cash revenues of $175,000 per year. Stuart has an effective income tax rate of 30 percent and a desired rate of return of 12 percent. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Determine the net present value and the present value index of the investment, assuming that Stuart uses straight-line depreciation for financial and income tax reporting. b. Determine the net present value and the present value index of the investment, assuming that Stuart uses double-declining-balance depreciation for financial and income tax reporting. d. Determine the payback period and unadjusted rate of return (use average investment), assuming that Stuart uses straight-line depreciation. e. Determine the payback period and unadjusted rate of return (use average investment); assuming that Stuart uses double-declining- balance depreciation. (Note: Use average annual cash flow when computing the payback period and average annual income when determining the unadjusted rate of return.)
Stuart Electronics is considering investing in manufacturing equipment expected to cost $350,000. The equipment has an estimated useful life of four years and a salvage value of $22,000. It is expected to produce incremental cash revenues of $175,000 per year. Stuart has an effective income tax rate of 30 percent and a desired rate of return of 12 percent. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Determine the net present value and the present value index of the investment, assuming that Stuart uses straight-line depreciation for financial and income tax reporting. b. Determine the net present value and the present value index of the investment, assuming that Stuart uses double-declining-balance depreciation for financial and income tax reporting. d. Determine the payback period and unadjusted rate of return (use average investment), assuming that Stuart uses straight-line depreciation. e. Determine the payback period and unadjusted rate of return (use average investment); assuming that Stuart uses double-declining- balance depreciation. (Note: Use average annual cash flow when computing the payback period and average annual income when determining the unadjusted rate of return.)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Stuart Electronics is considering investing in manufacturing equipment expected to cost $350,000. The equipment has an estimated
useful life of four years and a salvage value of $22,000. It is expected to produce incremental cash revenues of $175,000 per year.
Stuart has an effective income tax rate of 30 percent and a desired rate of return of 12 percent. (PV of $1 and PVA of $1)
Note: Use appropriate factor(s) from the tables provided.
Required
a. Determine the net present value and the present value index of the investment, assuming that Stuart uses straight-line depreciation
for financial and income tax reporting.
b. Determine the net present value and the present value index of the investment, assuming that Stuart uses double-declining-balance
depreciation for financial and income tax reporting.
d. Determine the payback period and unadjusted rate of return (use average investment), assuming that Stuart uses straight-line
depreciation.
e. Determine the payback period and unadjusted rate of return (use average investment); assuming that Stuart uses double-declining-
balance depreciation. (Note: Use average annual cash flow when computing the payback period and average annual income when
determining the unadjusted rate of return.)
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