INTERMEDIATE ACCOUNTING
10th Edition
ISBN: 9781264397921
Author: SPICELAND
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 10, Problem 10.4BE
Cost of a natural resource; asset retirement obligation
• LO10–1
Smithson Mining operates a silver mine in Nevada. Acquisition, exploration, and development costs totaled $5.6 million. After the silver is extracted in approximately five years, Smithson is obligated to restore the land to its original condition, including constructing a wildlife preserve. The company’s controller has provided the following three cash flow possibilities for the restoration costs: (1) $500,000, 20% probability; (2) $550,000, 45% probability; and (3) $650,000, 35% probability. The company’s credit-adjusted, risk-free rate of interest is 6%. What is the initial cost of the silver mine?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
V14
Steadman Company is considering an investment in a new machine for an independent five-year project. The machine’s cost is $837,500 with no salvage value at the end of five years. Net cash inflows from the project are expected to be $252,500 annually. Steadman would depreciate the machine using the MACRS schedule, and the machine qualifies as a 5-year asset. Steadman uses a discount rate of 8%, and its tax rate is 30%.
Required: 1. Determine the after-tax net income and after-tax cash flows from the investment. Refer to Exhibit 12.4 for the 5-year MACRS deprecation schedule.
2. Determine the NPV of the project.
3. Determine the IRR of the project.
4. Determine the payback period of the project, assuming that cash flows occur evenly in each year. 5. Determine the book (accounting) rate of return using both (a) the initial investment as the denominator and (b) the average book value of the investment as the denominator.
Question 1
Booth Company wants to buy a numerically controlled (NC) machine to be used in producing
specially machined parts for manufacturers of tractors. The outlay required is $960,000. The
NC equipment will last 5 years with no expected salvage value. The expected after-tax cash
flows associated with the project follow:
Year
Cash Revenues
Cash Expenses
1
$1,275,000
$900,000
1,475,000
1,015,000
3
1,650,000
1,200,000
4
1,358,000
1,118,000
5
1,550,000
1,225,000
Required:
A. Compute the payback period for the NC equipment.
B. Compute the NC equipment's ARR.
C. Compute the investment's NPV, assuming a required rate of return of 10%.
D. Compute the investment's IRR.
3 Problem 16-142 (Algo) Tanner Corporation is considering the acquisition of...
nner Corporation is considering the acquisition of a new machine that is expected to produce annual savings in cash operating costs
$55,000 before income taxes. The machine costs $150,000, has a useful life of five years, and no salvage value. Tanner uses
raight-line depreciation on all assets, is subject to a 10% Income tax rate, and has an after-tax hurdle rate of 10%.
Year
123456
FV of $1 at FV of an ordinary annuity PV of $1 at PV of an ordinary annuity
at 10%
at 10%
10%
1.100
1.210
1.331
1.464
1.611
1.772
1.000
2.100
3.310
4.641
6.105
7.716
A. Rate of return
B. Net present value
10%
0.909
0.826
0.751
0.683
0.621
0.564
equired:
Compute the machine's accounting rate of return on the initial investment.
. Compute the machine's net present value.
Note: For all requirements, do not round Intermediate calculations. Round final answers to whole number.
%
0.909
1.736
2.487
3.170
3.791
4.355
www
Chapter 10 Solutions
INTERMEDIATE ACCOUNTING
Ch. 10 - Prob. 10.1QCh. 10 - Prob. 10.2QCh. 10 - Prob. 10.3QCh. 10 - Prob. 10.4QCh. 10 - Prob. 10.5QCh. 10 - Prob. 10.6QCh. 10 - When an asset is acquired and a note payable is...Ch. 10 - Explain how assets acquired in exchange for equity...Ch. 10 - Prob. 10.9QCh. 10 - What account is credited when a company receives...
Ch. 10 - Prob. 10.11QCh. 10 - Identify the two exceptions to valuing property,...Ch. 10 - In what situations is interest capitalized?Ch. 10 - Define average accumulated expenditures and...Ch. 10 - Explain the difference between the specific...Ch. 10 - Prob. 10.16QCh. 10 - Prob. 10.17QCh. 10 - Explain the accounting treatment of costs incurred...Ch. 10 - Explain the difference in the accounting treatment...Ch. 10 - Prob. 10.20QCh. 10 - Prob. 10.21QCh. 10 - Prob. 10.22QCh. 10 - Prob. 10.23QCh. 10 - Acquisition cost; machine LO101 Beavert on Lumber...Ch. 10 - Prob. 10.2BECh. 10 - Prob. 10.3BECh. 10 - Cost of a natural resource; asset retirement...Ch. 10 - Asset retirement obligation LO101 Refer to the...Ch. 10 - Prob. 10.6BECh. 10 - Prob. 10.8BECh. 10 - Prob. 10.11BECh. 10 - Nonmonetary exchange LO106 Refer to the situation...Ch. 10 - Nonmonetary exchange LO106 Refer to the situation...Ch. 10 - Prob. 10.14BECh. 10 - Prob. 10.15BECh. 10 - Research and development LO108 Maxtor Technology...Ch. 10 - Prob. 10.18BECh. 10 - Prob. 10.19BECh. 10 - Research and development; various types LO108...Ch. 10 - Prob. 10.21BECh. 10 - Acquisition cost; equipment LO101 Oaktree Company...Ch. 10 - Prob. 10.3ECh. 10 - Prob. 10.7ECh. 10 - Prob. 10.8ECh. 10 - Acquisition costs; noninterest-bearing note ...Ch. 10 - Prob. 10.11ECh. 10 - Prob. 10.14ECh. 10 - Nonmonetary exchange LO106 [This is a variation...Ch. 10 - Prob. 10.16ECh. 10 - Nonmonetary exchange LO106 [This is a variation...Ch. 10 - Prob. 10.18ECh. 10 - Prob. 10.19ECh. 10 - Prob. 10.20ECh. 10 - FASB codification research LO101, LO106, LO107,...Ch. 10 - Prob. 10.30ECh. 10 - Prob. 10.31ECh. 10 - Prob. 10.32ECh. 10 - Intangibles; start-up costs LO101, LO108 Freitas...Ch. 10 - Prob. 10.1PCh. 10 - Prob. 10.4PCh. 10 - Acquisition costs; journal entries LO101, LO103,...Ch. 10 - Prob. 10.6PCh. 10 - Prob. 10.8PCh. 10 - Prob. 10.9PCh. 10 - Judgment Case 101 Acquisition costs LO101, LO103,...Ch. 10 - Judgment Case 104 Interest capitalization LO107...Ch. 10 - Prob. 10.6DMPCh. 10 - Prob. 10.7DMPCh. 10 - Judgment Case 108 Research and development LO108...Ch. 10 - Prob. 10.9DMPCh. 10 - Prob. 10.11DMPCh. 10 - Prob. 10.13DMPCh. 10 - Prob. 10.15DMPCh. 10 - Prob. 10.16DMP
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- shj.8 A company is considering the purchase of a new production machine and is not sure whether the project fulfills its investment objective. The company requires that all investments must have a positive net present value (NPV). The machine costs $100,000 and will be depreciated for tax purposes on a straight-line basis over its useful life of five years. The machine has a $0 salvage value. The project will generate $30,000 of pretax operating cash inflow annually. The company has a 25% effective income tax rate and uses a 10% discount rate for investment projects. Which of the following represents the NPV of the project? Select one: a. $(14,707) b. $(33,661) c. $13,724 d. $4,246arrow_forward19 A highwvay construction company is under contract to build a new roadway through a scenic area and two rural towns in Colorado. The road is expected to cost $18 million, with annual upkeep estimated at S150,000 per. Additional income from tourists of $900,000 per year is estimated If the road is expected to have a useful commercial life of 20 years, use one spreadsheet to determine if the highway should be constructed at an interest rate of 696 per year by applying (a) the B-C method, (b) the B/C method, and (c) the modified B C method. W VERON SAN FRANCISCOarrow_forwardFinancial Management Question QUESTION TWO A company is considering an investment proposal to install new milling controls. The project will cost Kshs 50,000,000. The facility has a life expectancy of five years and no salvage value. The company’s tax rate is 40%. The estimated cash flows from the proposed investment proposal are as follows: Year CF Kshs 000 1 13,000 2 14,000 3 18,000 4 23,000 5 25,000 Compute: Accounting Rate of Return Discounted payback period at 6% discounting factor Net present value at 15% discounting factor and advise management on the project’s feasibilityarrow_forward
- Perit Industries has $155,000 to invest in one of the following two projects: Cost of equipment required Working capital investment required Annual cash inflows Salvage value of equipment in six years Life of the project Project A $ 155,000 $ 25,000 $ 8,600 6 1. Net present value project A 2. Net present value project B 3. Which investment alternative (if either) would you recommend that the company accept? X Answer is complete but not entirely correct. Project B $0 $ 155,000 $ 40,000 years The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries' discount rate is 14%. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. Compute the net present value of Project A. Note: Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount. 2. Compute the net present value of Project B. $(53,971) 70,527 X Project B $0…arrow_forwardRequired information Use the following information for the Quick Study below. [The following information applies to the questions displayed below.] Project A requires a $380,000 initial investment for new machinery with a five-year life and a salvage value of $39,000. The company uses straight-line depreciation. Project A is expected to yield annual net income of $23,000 per year for the next five years. QS 25-6 Accounting rate of return LO P2 Compute Project A's accounting rate of return. Accounting Rate of Return Choose Numerator: Choose Denominator: = Accounting Rate of Return Accounting rate of returnarrow_forwardts 19 Riverview Company is evaluating the proposed acquisition of a new production machine. The machine's base price is $200,000, and installation costs would amount to $28,000. Also, $10,000 in net working capital would be required at installation. The machine will be depreciated for 3 years using simplified straight line depreciation. The machine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine in place for 2 years. At the end of the second year, the machine will be sold for $100,000. Riverview has a cost of capital of 12% and a marginal tax rate of 34%. What is the NPV of the project? O $12.155 O $3,875 O-$9,783 O $19,016 $9.555arrow_forward
- 36 Determine the capitalized cost of a research laboratory which requires P5,000,000 for original construction; P100,000 at the end of every year for the first 5 years and then P147,980 each year thereafter for operating expenses, and P500,000 every 6 years for replacement of equipment with interest at 12% per annum? A. 6,441,350 B. 6,067,015 C. 6,632,445 D. 6,573,650 E. None of the abovearrow_forwardExercise 1 The Sunshine company is considering two projects, project A and project B. Project A requires the purchase of an equipment but no working capital investment whereas project B requires a working | capital investment but no equipment. The relevant information for net present value analysis is given below: Cost of equipment Working capital needed Annual cash inflows Salvage value of equipment Project life Project A Project B $600,000 $160,000 $ 40,000 $600,000 $120,000 8 years 8 years The working capital required for project B will be released at the end of project life. Sunshine company uses an 18% discount rate. Select the best investment using net present value (NPV) method. (Ignore income tax).arrow_forwardQuestion 15 A dairy farm project has an initial requirement of $600,000 for fixed assets (i.e. goats) and $60,000 for net working capital. The price of their special goat cheese packages are $30.00 with a variable cost of $20.00 per package. The goats will be depreciated to a zero book value over the 3-year life of the project and will be worthless at the end of the project because the dairy farmer plans to give the goats away as pets. All of the net working capital will be recouped after 3 years. The expected annual operating cash flow is $240,000. If the tax rate is 35 percent, how sensitive is OCF to an increase of ten additional goat cheese packages sold? Group of answer choices $3.50 $6.50 $35.00 $65.00 $100.00arrow_forward
- Exercise 14-7 (Algo) Net Present Value Analysis of Two Alternatives [LO14-2) Perit Industries has $165,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Cost of equipment required working capital investment required Annual cash inflows Salvage value of equipment in six years Life of the project Project A $ 305,000 50 $ 21,000 1. Nat present valus project A 2. Net present value project B 3. Which investment alternative of either) would you recommend that the company accept? Project 8 $ 165,000 $ 56,000 years The working capital needed for project will be released at the end of six years for investment elsewhere. Perit Industries' discount rate is 14%. Click here to view Exhibit 148-1 and Exhibit 148-2, to determine the appropriate discount factors) using tables. Required: 1. Compute the net present value of Project A. (Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.) 2.…arrow_forwardQuestion 2 The directors of Paulter Ltd are currently considering two mutually exclusive investment projects. Both projects are concerned with the purchase of new equipment. The following information is available for each project: Cost (immediate outlay) Expected annual operating profit (loss) Year 1 2 3 4 5 Estimated residual value of the plant after 5 years Project 1 £ 120,000 29,000 (8,000) 12,000 22,000 18,000 7,000 Project 2 £ 80,000 18,000 (2,000) 9,000 12,000 14,000 6,000 The business uses the straight-line method of depreciation for all of its non-current (fixed) assets when calculating operating profit. Because of capital rationing only one project can be accepted. The business has an estimated cost of capital of 8%. Required: a) Calculate the annual depreciation of each project b) Calculate for each project: i. the net present value; ii. the accounting rate of return; iii. the payback period c) State with reasons which, if any, of the two investment projects the directors of…arrow_forwardCH 5#9 The A Corporation is considering the construction of a new plant to build a component part that it is currently purchasing. It has the following information. Item Cost Expected life Plant $20,000,000 40 years Utilities 10,000,000 20 years Equipment 15,000,000 10 years The operating costs are estimated at $5 million per year, assuming an output of 1 million units of product per year. The corporation uses a discount rate of 0.05. It can purchase the product at a cost of $10 per unit. Should the new plant be built (on a straight economic basis)?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Depreciation -MACRS; Author: Ronald Moy, Ph.D., CFA, CFP;https://www.youtube.com/watch?v=jsf7NCnkAmk;License: Standard Youtube License