Upper Division of Lower Company acquired an asset with a cost of $620,000 and a four-year life. The cash flows from the asset,considering the effects of inflation, were scheduled as follows.Year Cash Flow1234$229,000259,000289,000304,000The cost of the asset is expected to increase at a rate of 10 percent per year, compounded each year. Performance measures arebased on beginning-of-year gross book values for the investment base. Ignore taxes. Assume that the company uses a 15 percent costof capital.Year 1Year 2Year 3Year 4Required:a. What is the residual income for each year of the asset's life, using a historical cost approach?b. What is the residual income for each year of the asset's life if both the investment base and depreciation are determined by thecurrent cost of the asset at the start of each year?(Negative amounts should be indicated by a minus sign.)Residual IncomeHistorical Cost Current Cost

Working Note #1 Cost of assets will increase by 10% every year Year Cost of Assets(Formula)…

Answered: Upper Division of Lower Company…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

An investment property is purchased for $18,540,000 with 50% equity and an interest-only loan to finance the balance. The average appreciation rate of the property is 5% per annum. All operating costs, including finance costs, are exactly equal to rent income. If the property is sold after 10 years and selling costs are 3% of the sale price (based on market valuation of determined from the annual rate of appreciation), the ROE (return on equity) is: Select one: a. 7.59% b. 8.01% c. 9.34% d. 10.03% 11.38% e.
A property was purchased by a property manager's client for $7,000, 000 with a $2, 000, 000 down payment and a 30 year. $ 5,000, 000 loan with a 7% interest rate. Grous potential income (GPI) for the property is expected to be $850, 000 in year one. Operating expenses are expected to be $350,000 in year one. Both are expected to increase by 3% each year. The property is expected to sell at the end of year five at a 7% going-out capitalization rate with 5% costs of sale. The investor's required rate of returns 12%.
An investment project will involve spending $300,000 at time zero and $450,000 at the end of year one. These investments will generate gross revenues of $420,000 at the end of year one and $660,000 at the end of each year two through eight. A royalty of $42,000 in year one and $66,000 in year two through eight will be incurred along with operating costs of $250,000 in year one and $350,000 at the end of each year two through eight. Calculate the project before-tax cash flow for each year. A) For a rate of return of 15%, calculate the net present value (NPV), THEN Calculate the present value ratio (PVR) AND Calculate the benefit-cost (B-C) ratio B) Is this project economically satisfactory, why?
The Highway Department expects the cost of maintenance for a piece of heavy construction equipment to be $3,000 in year 1, to be $3,500 in year 2, and to increase annually by $500 through year 8. At an interest of 6% per year, determine the present worth of 8 years of maintenance costs.
An investment of $1,250,000 is made in 7-year MACRS-GDS equipment. The investment yields annual before-tax returns of $200,000, plus a salvage value of $500,000 at the end of the 10-year planning horizon. The MARRAT is 7%, the income tax rate is 25%, the maximum Section 179 expense deduction is taken and 50% bonus depreciation applies. For the investment, calculate a. After-tax present worth, b. After-tax annual worth, and c. EVA.
2. If an asset costs $26,280 and is expected to have a salvage value of $3,104 at the end of five year life, and generates annual cash net cash inflows of $5,675 each year, the cash payback period rounding to two decimal places is
Assume that a company has provided the following information regarding a capital investment opportunity: $ 150,000 $ 30,000 $ 160,000 $ 70,000 $ 20,000 Initial investment in equipment Initial investment in working capital Estimated annual sales Estimated annual cash operating expenses Repairs and maintenance in 3 years Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided. The equipment has a four-year useful life and no salvage value. The working capital will be released at the end of the project. The company's tax rate is 30%. Assuming a discount rate of 20%, the present value of all relevant cash flows from year 4 is closest to: Multiple Choice $52.826. $50.249. $44,826. $47,249.
DEF Corporation has projected that their performance for the next five years will result to the following: Cash Operating Expenses P30,000,000 33,000,000 36,300,000 39,930,000 43,920,000 Year Revenue P 50,000,000 55,000,000 60,500,000 66,550,000 73,210,000 1 3 4 The corporation owns a property originally acquired at P50 million with useful life of 10 years. The terminal value was assumed based on the growth rate of the cash flows. Annual capital investment requirement is at P2 million. Income tax rate is at 30%. The required rate of return for this business is 14%. Compute the following: 1. Terminal value 2. Net cash flows to the firm 3. Discounted net cash flows to the firm
An engineering project has an investment amount of $126379 with an annual net profit of $53949 for 6 years. If the interest rate and average inflation rate are 15% and 6%, respectively, calculate the present worth of the entire period.
Border Steel invested $800,000 in a new shearing unit. At an interest rate of 12% per year compounded quarterly, the quarterly income required to recover the investment in 3 years is closest to:a. $69,610b. $75,880c. $80,370d. $83,550
Subject:- finance
The NUBD Co. acquired a new machine for P160,000 which will be depreciated on a straight-line basis over ten year period. A full year’s depreciation was taken in the year of acquisition. The accounting rate of return is expected to be 15% on the initial increase in required investment. If we assume a uniform cash inflow, the annual cash flow from operations, net of income taxes, will be

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS