Managerial Accounting: Creating Value in a Dynamic Business Environment
12th Edition
ISBN: 9781260417074
Author: HILTON, Ronald
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 16, Problem 34E
The owner of Atlantic City Confectionary is considering the purchase of a new semiautomatic candy machine. The machine will cost $25,000 and last 10 years. The machine is expected to have no salvage value at the end of its useful life. The owner projects that the new candy machine will generate $4,000 in after-tax savings each year during its life (including the depreciation tax shield).
Required: Compute the profitability index on the proposed candy machine, assuming an after-tax hurdle rate of: (a) 8 percent, (b) 10 percent, and (c) 12 percent.
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he owner of Atlantic City Confectionary is considering the purchase of a new semiautomatic candy machine. The machine will cost $25,000 and last 10 years. The machine is expected to have no salvage value at the end of its useful life. The owner projects that the new candy machine will generate $4,000 in after-tax savings each year during its life (including the depreciation tax shield).
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Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)
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Required:
Compute the profitability index on the proposed candy machine, assuming an after-tax hurdle rate of: (a) 8 percent, (b) 10 percent, and (c) 12 percent. (Round your final answers to 2 decimal places.)
Managers at Eller Manufacturing are considering purchasing a new refrigerated delivery truck that will
produce equal annual cash flows of $36,000 for 6 years. The truck's net present value is $12,780, its cost is
$144,000, its useful life is 6 years, and its annual depreciation expense (no salvage value) is $24,000.
What is the discount rate used by Eller to evaluate this project?
The Oviedo Company is considering the purchase of a new machine to replace an obsolete one. The machine being used for the operation has a book value and a market value of zero. However, the machine is in good working order and will last at least another 10 years. The proposed replacement machine will perform the operation so much more efficiently that Oviedo's engineers estimate that it will produce after-tax cash flows (labor savings) of $6,000 per year. The after-tax cost of the new machine is $30,000, and its economic life is estimated to be 10 years. It has zero salvage value. The firm's WACC is 10%, and its marginal tax rate is 25%.
Should Oviedo buy the new machine?
Oviedo (should or Should not) purchase the new machine.
Chapter 16 Solutions
Managerial Accounting: Creating Value in a Dynamic Business Environment
Ch. 16 - Prob. 1RQCh. 16 - Prob. 2RQCh. 16 - Prob. 3RQCh. 16 - Prob. 4RQCh. 16 - Prob. 5RQCh. 16 - Explain the following terms: recovery of...Ch. 16 - List and briefly explain two advantages that the...Ch. 16 - List and briefly explain four assumptions...Ch. 16 - Prob. 9RQCh. 16 - Prob. 10RQ
Ch. 16 - Give an example of a noncash expense. What impact...Ch. 16 - Prob. 12RQCh. 16 - What is a depreciation tax shield? Explain the...Ch. 16 - Prob. 14RQCh. 16 - Why is accelerated depreciation advantageous to a...Ch. 16 - Prob. 16RQCh. 16 - Why may the net-present-value and...Ch. 16 - Prob. 18RQCh. 16 - What is meant by the term payback period? How is...Ch. 16 - Prob. 20RQCh. 16 - How is an investment projects accounting rate of...Ch. 16 - Prob. 22RQCh. 16 - Prob. 23RQCh. 16 - Prob. 24ECh. 16 - Refer to the data given in the preceding exercise....Ch. 16 - Prob. 26ECh. 16 - Prob. 28ECh. 16 - Prob. 29ECh. 16 - Prob. 30ECh. 16 - Prob. 31ECh. 16 - Prob. 32ECh. 16 - Sharpe Machining Company purchased industrial...Ch. 16 - The owner of Atlantic City Confectionary is...Ch. 16 - The management of Niagra National Bank is...Ch. 16 - Allegience Insurance Companys management is...Ch. 16 - Prob. 37ECh. 16 - Prob. 38ECh. 16 - The states Secretary of Education is considering...Ch. 16 - The supervisor of the county Department of...Ch. 16 - Prob. 41PCh. 16 - Prob. 42PCh. 16 - Prob. 43PCh. 16 - Special People Industries (SPI) is a nonprofit...Ch. 16 - Washington Countys Board of Representatives is...Ch. 16 - Prob. 46PCh. 16 - Prob. 47PCh. 16 - Mind Challenge, Inc. publishes innovative science...Ch. 16 - Philadelphia Fastener Corporation manufactures...Ch. 16 - Prob. 50PCh. 16 - Prob. 51PCh. 16 - Prob. 52PCh. 16 - Prob. 53PCh. 16 - Prob. 54PCh. 16 - Prob. 55PCh. 16 - Prob. 56PCh. 16 - Pensacola Cablevision Company provides television...Ch. 16 - Pensacola Cablevision Company provides television...Ch. 16 - The board of education for the Central Catskill...Ch. 16 - Prob. 60C
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