estimated cash flows before tax (CFBT) are? 10,000; 11,000; R14,000; 15,000 and new machinery. The project will cost 50,000 with life of 5 years and no salvage value. Question. 3. A company is considering an investment proposal to install a Belax rate of the company is 55% and it uses straight line method of depreciation. The 25,000 during years 1,2,3,4 and 5 respectively. Compute: (i) Average rate of return. (ii) NPV at 10% discount rate. (iii) Profitability Index at 10% discount rate. Note : Discount factors at 10% are 0.909, 0.826, 0.751, 0.683 and 0.621 for the years 1,2,3,4 and 5.

estimated cash flows before tax (CFBT) are? 10,000; 11,000; R14,000; 15,000 and new machinery. The project will cost 50,000 with life of 5 years and no salvage value. Question. 3. A company is considering an investment proposal to install a Belax rate of the company is 55% and it uses straight line method of depreciation. The 25,000 during years 1,2,3,4 and 5 respectively. Compute: (i) Average rate of return. (ii) NPV at 10% discount rate. (iii) Profitability Index at 10% discount rate. Note : Discount factors at 10% are 0.909, 0.826, 0.751, 0.683 and 0.621 for the years 1,2,3,4 and 5.

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 14E

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The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given here. The company’s cost of capital is 10%. Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life? Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
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The Berndt Corporation expects to have sales of 12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be 1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Berndts federal-plus-state tax rate is 40%. Berndt has no debt. a. Set up an income statement. What is Berndts expected net income? Its expected net cash flow? b. Suppose Congress changed the tax laws so that Berndts depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow? c. Now suppose that Congress changed the tax laws such that, instead of doubling Berndts depreciation, it was reduced by 50%. How would profit and net cash flow be affected? d. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?
Cost of Capital, Net Present Value Leakam Companys product engineering department has developed a new product that has a 3-year life cycle. Production of the product requires development of a new process that requires a current 100,000 capital outlay. The 100,000 will be raised by issuing 60,000 of bonds and by selling new stock for 40,000. The 60,000 in bonds will have net (after-tax) interest payments of 3,000 at the end of each of the 3 years, with the principal being repaid at the end of Year 3. The stock issue carries with it an expectation of a 17.5% return, expressed in the form of dividends at the end of each year (with 7,000 in dividends expected for each of the next 3 years). The sources of capital for this investment represent the same proportion and costs that the company typically has. Finally, the project will produce after-tax cash inflows of 50,000 per year for the next 3 years. Required: 1. Compute the cost of capital for the project. (Hint: The cost of capital is a weighted average of the two sources of capital, where the weights are the proportion of capital from each source.) 2. CONCEPTUAL CONNECTION Compute the NPV for the project. Explain why it is not necessary to subtract the interest payments and the dividend payments and appreciation from the inflow of 50,000 in carrying out this computation.