Managerial Accounting
17th Edition
ISBN: 9781260247787
Author: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer
Publisher: RENT MCG
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Textbook Question
Chapter 14.C, Problem 3P
PROBLEM 13C-3 Income Taxes and
Lander Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. After careful study, Lander estimated the following costs and revenues for the project:
Cost of equipment needed………………………………….. $250,000
Repair the equipment in two years………………………….. $18,000
Annual revenues and costs:
Sales revenues………………………………………………… $350,000
Variable expenses…………………………………………….. $180,000
Fixed out-of-pocket operating costs………………………….. $80,000
The piece of equipment mentioned above has a useful life of five years and zero salvage value. Lander uses straight-line depreciation for financial reporting and tax purposes. The company's tax rate is 30% and its after tax cost of capital is 12%. When the project concludes in five years the working capital will be released for investment elsewhere within the company.
Required:
- Calculate the annual income tax expense for each of years 1 through 5 that will arise as a result of this investment opportunity.
- Calculate the net present value of this investment opportunity.
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ST-2
CAPITAL BUDGETING CRITERIA You must analyze two projects, X and Y. Each
project costs $10,000, and the firm's WACC is 12%. The expected net cash flows are
as follows:
2
3
Project X -$10,000
Project Y
-$10,000
$6,500
$3,500
$3,000
$3,500
$3,000
$3,500
$1,000
$3,500
a. Calculate each project's NPV, IRR, MIRR, payback, and discounted payback.
b. Which project(s) should be accepted if they are independent?
c. Which project(s) should be accepted if they are mutually exclusive?
d. How might a change in the WACC produce a conflict between the NPV and IRR
rankings of the two projects? Would there be a conflict if WACC were 5%? (Hint: Plot
the NPV profiles. The crossover rate is 6.21875%.)
e. Why does the conflict exist?
B
Assume the following information for a capital budgeting proposal with a five-year time horizon:
Initial investment:
Cost of equipment (zero salvage value)
Annual revenues and costs:
Sales revenues
Variable expenses
Depreciation expense
Fixed out-of-pocket costs
This proposal's simple rate of return is closest to:
Multiple Choice
O
27%.
16%.
19%
11%
$ 485,000
$ 300,000
$ 130,000
$ 50,000
$ 40,000
-2
CAPITAL BUDGETING CRITERIA You must analyze two projects, X and Y. Each
project costs $10,000, and the firm's WACC is 12%. The expected net cash flows are
as follows:
1
2
3
+
$6,500
$3,500
+
$3,000
$3,500
Project X
-$10,000
$3,000
$3,500
$1,000
$3,500
Project Y -$10,000
a. Calculate each project's NPV, IRR, MIRR, payback, and discounted payback.
b. Which project(s) should be accepted if they are independent?
Which project(s) should be accepted if they are mutually exclusive?
d. How might a change in the WACC produce a conflict between the NPV and IRR
rankings of the two projects? Would there be a conflict if WACC were 5%? (Hint: Plot
the NPV profiles. The crossover rate is 6.21875%.)
e. Why does the conflict exist?
C.
Chapter 14 Solutions
Managerial Accounting
Ch. 14.A - Prob. 1ECh. 14.A - Prob. 2ECh. 14.A - Prob. 3ECh. 14.A - Prob. 4ECh. 14.A - Exercises 13A-5 Basic Present Value Concepts...Ch. 14.A - Prob. 6ECh. 14.C - Prob. 1ECh. 14.C - Prob. 2ECh. 14.C - PROBLEM 13C-3 Income Taxes and Net Present Value...Ch. 14.C - Prob. 4P
Ch. 14.C - PROBLEM 13C-5 Income Taxes and Net Present Value...Ch. 14 - Prob. 1QCh. 14 - Prob. 2QCh. 14 - Prob. 3QCh. 14 - Prob. 4QCh. 14 - Prob. 5QCh. 14 - Prob. 6QCh. 14 - Prob. 7QCh. 14 - Prob. 8QCh. 14 - Prob. 9QCh. 14 - Prob. 10QCh. 14 - Prob. 11QCh. 14 - Prob. 12QCh. 14 - Prob. 13QCh. 14 - Prob. 14QCh. 14 - What is the major criticism of the payback and...Ch. 14 -
The Excel worksheet form that appears below is to...Ch. 14 - Prob. 2AECh. 14 - Prob. 1F15Ch. 14 - Prob. 2F15Ch. 14 - Prob. 3F15Ch. 14 - Prob. 4F15Ch. 14 - Prob. 5F15Ch. 14 - Prob. 6F15Ch. 14 - Prob. 7F15Ch. 14 - Prob. 8F15Ch. 14 - Prob. 9F15Ch. 14 - Prob. 10F15Ch. 14 - (
595.000
)...Ch. 14 - Prob. 12F15Ch. 14 - Prob. 13F15Ch. 14 - Prob. 14F15Ch. 14 - Prob. 15F15Ch. 14 - Prob. 1ECh. 14 - Prob. 2ECh. 14 - Prob. 3ECh. 14 - Prob. 4ECh. 14 - Prob. 5ECh. 14 - Prob. 6ECh. 14 - Prob. 7ECh. 14 - Prob. 8ECh. 14 - Prob. 9ECh. 14 - Prob. 10ECh. 14 - Prob. 11ECh. 14 - Prob. 12ECh. 14 - Prob. 13ECh. 14 - Prob. 14ECh. 14 -
EXERCISE 13-15 Internal Rateof Return and Net...Ch. 14 - Prob. 16PCh. 14 - PROBLEM 13-17 Net Present Value Analysis; Internal...Ch. 14 - Prob. 18PCh. 14 - Prob. 19PCh. 14 - Prob. 20PCh. 14 - Prob. 21PCh. 14 - Prob. 22PCh. 14 - Prob. 23PCh. 14 - Prob. 24PCh. 14 - Prob. 25PCh. 14 - Prob. 26PCh. 14 -
PROBLEM 13-27 Net Present Value Analysis...Ch. 14 - Prob. 28PCh. 14 - Prob. 29PCh. 14 - Prob. 30PCh. 14 - Prob. 31CCh. 14 - Prob. 32C
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- W The cash flows in the table below represent the potential annual savings associated with two different types of production processes, each of which requires an investment of $40,000. Assume an interest rate of 12%. Compute the equivalent annual worth (AE) of each process and determine which process should be selected. n Process A 0 1 2 3 -$40,000 $19,120 $17,840 $16,560 $15,280 Process B -$40,000 $17,350 $17,350 $17,350 $17,350arrow_forwardQuestions 12 Hampton Company plans to incur $242,000 of additional cash operating expenses and produce $434,000 of additional sales revenue if a capital project is implemented. Assuming a 30% tax rate, these two items collectively should appear in a capital budgeting analysis as: Multiple Choice a $169,400 outflow. a $61,800 outflow. a $134,400 outflow. a $61,800 inflow. a $134,400 inflow. Please show workarrow_forwardProblem 1 Ziege Systems is considering the following independent projects for the next year. REQUIRED RATE OF INVESTMENT RETURN $4 million 14.0% $5 million 11.5 $3 million 9.5 9.0 12.5 12.5 7.0 11.5 PROJECT A B C D EFGH H $2 million $6 million $5 million $6 million $3 million RISK High High Low Average High Average Low Low The company estimates that its WACC is currently 10%. The company adjusts for risk by adding 2% for WACC for high-risk projects and subtracting 2 % from the WACC (discount rate) for low-risk projects. a. Which projects should Ziege accept if it faces no capital constraints ? b. If Ziege only has the ability to invest a total of $13 million, which projects should it accept?arrow_forward
- Assume that the manager faces a capital budget constraint with respect to total dollars available today to invest in new projects, $46 million. Assume same WACC for each project. All else equal, which project or set of otherwise independent projects should the manager choose? Project NPV (in $millions) IRR Required Investment today A $ 10 14.0% $ 22 B $ 9 12.9% $ 23 C $ 11 14.1% $ 23arrow_forwardProblem 14C-3 (Algo) Income Taxes and Net Present Value Analysis [LO14-8) Lander Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. Lander estimated the following costs and revenues for the project: Cost of equipment needed Working capital needed Repair of the equipment in two years Annual revenues and costs: Sales revenues Variable expenses Fixed out-of-pocket operating costs $ 420,000 $ 79,000 $ 27,500 $ 540,000 $ 275,000 $ 118,000 The piece of equipment mentioned above has a useful life of five years and zero salvage value. Lander uses straight-line depreciati for financial reporting and tax purposes. The company's tax rate is 30% and its after-tax cost of capital is 10%. When the project concludes in five years, the working capital will be released for investment elsewhere within the company. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. 1. Income tax expense Year 1 Year…arrow_forwardWACC AND OPTIMAL CAPITAL BUDGET Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Kate of Return 1 2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.30 The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of 5.00 per year at 50.00 per share. Also, its common stock currently sells for 38.00 per share; the next expected dividend, D1, is 4.25, and the dividend is expected to grow at a constant rate of 5% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. a. What is the cost of each of the capital components? b. What is Adamson's WACC? c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?arrow_forward
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