Why straight-line depreciation method is used instead of the sinking fund depreciation method? Assuming a agricultural water project that has an initial investment of 1 billion RMB and a time frame of5 years, with a predicted 0.8 billion RMB/year revenue and operation fee 0.45 billion RMB plus 25% ofenterprise income tax. If to adopt the straight-line depreciation method, the weighted mean capital costis 10%. According to the corresponding equations mentioned above, the project can get its investmentNPV, EVA and accumulative economic value added (MVA) (Table 1).Table 1: NPV and EVA investment decision analysis of agricultural water project (unit: 10 thousand RMB)Time (year)45Initial investment10000080000Operation incomeOperation costDepreciationIncome taxation8000080000800008000045000200003750450004500045000450002000037502000020000200003750375011250375011250312501125031250NOPAT1125011250After-tax cash flow312503125031250NPV18462Capital costEVA100001250100001250100001000010000125012501250MVA18462

Straight line method of depreciation is mostly used by accountant even though not so accurate but…

ears, with a predicted 0.8 billion RMB/year revenue and operation fee 0.45 billion RMB plus erprise income tax. If to adopt the straight-line depreciation method, the weighted mean ca 0%. According to the corresponding equations mentioned above, the project can get its inve (, EVA and accumulative economic value added (MVA) (Table 1). = 1: NPV and EVA investment decision analysis of agricultural water project (unit: 10 thousand RMB) Time (year) 4 5 I investment ation income 100000 80000 80000 80000 80000 800 15000 AR000 A5000 A5000 A50

ears, with a predicted 0.8 billion RMB/year revenue and operation fee 0.45 billion RMB plus erprise income tax. If to adopt the straight-line depreciation method, the weighted mean ca 0%. According to the corresponding equations mentioned above, the project can get its inve (, EVA and accumulative economic value added (MVA) (Table 1). = 1: NPV and EVA investment decision analysis of agricultural water project (unit: 10 thousand RMB) Time (year) 4 5 I investment ation income 100000 80000 80000 80000 80000 800 15000 AR000 A5000 A5000 A50

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 13E: Buena Vision Clinic is considering an investment that requires an outlay of 600,000 and promises a...

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Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?
Redbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?
Jasmine Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, and $2,000 for years 6 through 10. What is the payback period for this project?
Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is 2,293,200. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows: Required: 1. Compute the projects payback period. 2. Compute the projects accounting rate of return. 3. Compute the projects net present value, assuming a required rate of return of 10 percent. 4. Compute the projects internal rate of return.
Buena Vision Clinic is considering an investment that requires an outlay of 600,000 and promises a net cash inflow one year from now of 810,000. Assume the cost of capital is 10 percent. Required: 1. Break the 810,000 future cash inflow into three components: a. The return of the original investment b. The cost of capital c. The profit earned on the investment 2. Now, compute the present value of the profit earned on the investment. 3. Compute the NPV of the investment. Compare this with the present value of the profit computed in Requirement 2. What does this tell you about the meaning of NPV?
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of 170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be 138 per case, and the Year-1 cost per case will be 105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the projects NPV?