Whispering Corp. is planning to replace an old asset with new equipment that will operate more efficiently. The following amounts m be relevant to this analysis. Cost of old asset Book value of old asset Selling price of old asset Purchase price of new replacement asset Estimated salvage value of new asset Estimated useful life of new asset Estimated annual net operating cash inflows Discount rate Tax rate Cost of old asset Book value of old asset Determine which amounts listed are relevant cash flows for Whispering Corp. as it considers this asset sale and replacement. Selling price of old asset Purchase price of new replacement asset Estimated salvage value of new asset Estimated annual net operating cash inflows $11.100 $2,100 $2,100 $20,100 $2,100 5 years $3,000/year for 5 years NPV $ 8% 20% Irrelevant Relevant Irrelevant Relevant Relevant Relevant Then, find the NPV of the new investment. (Round present value factor calculations to 5 decimal places, eg. 1.25124 and final answer to 2 decimal places e.g. 5,125.36. Enter negative amounts using either a negative sign preceding the number, e.g. -5,125.36 or parentheses, e.g. (5,125.36).) Click here to view the factor table

Whispering Corp. is planning to replace an old asset with new equipment that will operate more efficiently. The following amounts m be relevant to this analysis. Cost of old asset Book value of old asset Selling price of old asset Purchase price of new replacement asset Estimated salvage value of new asset Estimated useful life of new asset Estimated annual net operating cash inflows Discount rate Tax rate Cost of old asset Book value of old asset Determine which amounts listed are relevant cash flows for Whispering Corp. as it considers this asset sale and replacement. Selling price of old asset Purchase price of new replacement asset Estimated salvage value of new asset Estimated annual net operating cash inflows $11.100 $2,100 $2,100 $20,100 $2,100 5 years $3,000/year for 5 years NPV $ 8% 20% Irrelevant Relevant Irrelevant Relevant Relevant Relevant Then, find the NPV of the new investment. (Round present value factor calculations to 5 decimal places, eg. 1.25124 and final answer to 2 decimal places e.g. 5,125.36. Enter negative amounts using either a negative sign preceding the number, e.g. -5,125.36 or parentheses, e.g. (5,125.36).) Click here to view the factor table

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 1MAD: San Lucas Corporation is considering investment in robotic machinery based upon the following...

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San Lucas Corporation is considering investment in robotic machinery based upon the following estimates: a. Determine the net present value of the equipment, assuming a desired rate of return of 10% and annual net cash flows of 700,000. Use the present value tables appearing in Exhibits 2 and 5 of this chapter. b. Determine the net present value of the equipment, assuming a desired rate of return of 10% and annual net cash flows of 500,000, 700,000, and 900,000. Use the present value tables (Exhibits 2 and 5) provided in the chapter in determining your answer. c. Determine the minimum annual net cash flow necessary to generate a positive net present value, assuming a desired rate of return of 10%. Round to the nearest dollar. d. Interpret the results of parts (a), (b), and (c).
Which of the following statements is (are) correct?a. Accumulated depreciation represents a cash fund beingaccumulated for the replacement of plant assets.b. The cost of a machine includes the cost of repairingdamage to the machine during the installation process.c. A company may use different depreciation methods inits financial statements and its income tax return.d. The use of an accelerated depreciation method causesan asset to wear out more quickly than does use of thestraight-line method.
Which one of the following would correctly describe the net realisable value of a two year old asset? Select one alternative The original cost of the asset less two years' depreciation The cost of an equivalent new asset less two years' depreciation The amount that could be obtained from selling the asset, less any costs of disposal The present value of the future cash flows obtainable from continuing to use the asset
Which of the following research and development costs should always be capitalized? a. costs of intangibles purchased from othersb. costs of materials, equipment, and intangibles with alternative future uses purchased fromothersc. costs of equipment with an expected life greater than three yearsd. costs of contract services purchased from others
Which of the following statement best describes depreciation? a. It is a means of spreading the payment for non-current assets over a period of years b. It is a decline in the market value of assets c. It is a means of spreading the cost of non-current assets over the estimated useful life d. It is a means of estimating the amount of money needed to replace the assets
1. Which of the following is NOT a method commonly used to determine the residual value of a property? a) Estimate the residual value from expected changes in property value due to projected income b) Estimate the residual value from sales data of older “comparable” properties c) Discount all remaining cash flows for the specified holding period and then use a terminal cap rate for all future years d) Hire an appraiser to perform a forward-looking appraisal of the property 2. Which of the following is generally NOT found in a commercial lease? a) Limits on social events held in the space b) Restrictions on assignment or subletting c) Responsibility for maintenance and repair d) Alteration restrictions 3. The possibility that a property might be rezoned would be considered a: a) Business risk b) Financial risk c) Environmental risk d) Legislative risk 4. Which of the following statements is NOT true of real estate syndications? a) They offer tax benefits…
In the System, if you sell an asset that belongs to a particular class that faces a depreciation recapture penalty, which of the following could never happen simultaneously A Capital Gains Tax B Purchase Price< Salvage Value C Salvage Value >UCC D Loss on disposal Determine the discounted payback period of a project that requires an investment of $7, 500 today, an investment of $3, 500 next year, and then generates cash flows of $9,000 in every subsequent year. Assume a discount rate of 12.0% A 2.54 years B 1.46 years C 1.22 years D 1.54 years E 1.61 years
ABS Corporation is considering an investment in new machinery and is gathering data about the purchase. The new machine costs $500,000 and will have delivery charges of $45,000 and installation charges of $25,000. The new machine will be depreciated over 5 years and the salvage value will not be considered in the depreciation calculation. The old machinery had an original cost of $200,000. The current book value of the old machinery is $15,000 and has a current market value of $25,000. The new machine is expected to produce marginal cash revenues of $325,000 and marginal cash expenses of $75,000 annually for each of the next 5 years. The new machine will be sold at the end of the 5-year project for $30,000, when it will be fully depreciated. ABS is subject to a 25% tax rate. ABS corporation has a weighted average cost of capital of 12%, but since this project is riskier than other projects, management has decided to adjust the required rate of return by 2%. Calculate the net present…
MacDonald Publishing is considering entering a new line of business. In analyzing the potential business, their financial staff has accumulated the following information: The new business will require a capital expenditure of $5 million at t = 0. This expenditure will be used to purchase new equipment. This equipment will be depreciated according to the following depreciation schedule: MACRS Depreciation Year Rates 1 0.33 2 0.45 3 0.15 4 0.07 The equipment will have no salvage value after four years. If MacDonald goes ahead with the new business, inventories will rise by $500,000 at t = 0, and its accounts payable will rise by $200,000 at t = 0. This increase in net operating working capital will be recovered at t = 4. The new business is expected to have an economic life of four years. The business is expected to generate sales of $3 million at t = 1, $4 million at t = 2, $5 million at t = 3, and $2 million at t = 4.…
Which of the following is considered when depreciating an asset under the cost model? The cost of the asset. The change in the fair value of the asset. The useful life of the asset. Both a and b. Which of the following depreciation methods will most likely result in the highest amount of reported profit in the early years of an asset’s useful life? Straight line 150% declining balance Double declining balance Sum-of-the-years’ digits The most commonly used depreciation method is the straight-line method. replacement method. depreciation method based on revenue. inventory method.
At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best financial decision for the company. Johnson Co. is considering replacing an existing piece of equipment. The project involves the following: • The new equipment will have a cost of $1,200,000, and it is eligible for 100% bonus depreciation so it will be fully depreciated at t = 0. • The old machine was purchased before the new tax law, so it is being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left ($50,000 per year). • The new equipment will have a salvage value of $0 at the end of the project's life (year 6). The old machine has a current salvage value (at year 0) of $300,000. • Replacing the old machine will require an investment in net operating working capital (NOWC) of…
Should the following be ignored, or rather added or subtracted from the new machine’spurchase price when estimating initial cash outflow? When estimating the machine’s depreciablebasis?a. The old machine is saleable at S500 in the market.b. Book value of the old machine is $300, it still has 1 year of depreciable life and 2 years ofuseful life.c. Replacement of the old machine with the new one will require $ 1500 additional investmentin inventoryd. Shipment and installation of the new machine at the plant site will incur $ 400e. Training of the machine operator will cost $ 350