TB MC Qu. 12-83 (Algo) Estimated PV (present value) payback period: Plant Company Plant Company is contemplating the purchase of a new piece of equipment for $47,000. Plant is in the 30% income tax bracket. Predicted annual after-tax cash inflows from this investment are $20,000, $10,000, $12,000, $7,000 and $5.000 for years 1 through 5, respectively. The firm uses straight-line depreciation with no residual value at the end of five years. Assume that the hurdle rate for accepting new capital investment projects for the company is 4%, after-tax. (Note: PV $1 factors for 4% are as follows: for year 1= 0.962, for year 2 = 0.925, for year 3 = 0.889, for year 4 = 0.855, for year 5 0.822; the PV annuity factor for 4%, 5 years 4.452.) At an after-tax discount rate of 4%, the estimated PV (present value) payback period, in years (rounded to two decimal places) is: Multiple Choice 3.07 years. 3.68 years 4.07 years. 4.45 years. More than 5 years.

TB MC Qu. 12-83 (Algo) Estimated PV (present value) payback period: Plant Company Plant Company is contemplating the purchase of a new piece of equipment for $47,000. Plant is in the 30% income tax bracket. Predicted annual after-tax cash inflows from this investment are $20,000, $10,000, $12,000, $7,000 and $5.000 for years 1 through 5, respectively. The firm uses straight-line depreciation with no residual value at the end of five years. Assume that the hurdle rate for accepting new capital investment projects for the company is 4%, after-tax. (Note: PV $1 factors for 4% are as follows: for year 1= 0.962, for year 2 = 0.925, for year 3 = 0.889, for year 4 = 0.855, for year 5 0.822; the PV annuity factor for 4%, 5 years 4.452.) At an after-tax discount rate of 4%, the estimated PV (present value) payback period, in years (rounded to two decimal places) is: Multiple Choice 3.07 years. 3.68 years 4.07 years. 4.45 years. More than 5 years.

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter12: Capital Investment Decisions

Section: Chapter Questions

Problem 49P: Cost of Capital, Net Present Value Leakam Companys product engineering department has developed a...

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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.
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