Engineering Economy (17th Edition)
17th Edition
ISBN: 9780134870069
Author: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher: PEARSON
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Chapter 13, Problem 10P
To determine
Whether the firm should borrow and buy or lease.
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When determining the present worth of the after-tax cash flows of an investment purchased using borrowed funds, which of the following are required? I. Principal and interest component for each loan payment II. Tax rate applied to the taxable income generated by the investment III. Depreciation deductions for the investment IV. Before-tax and loan cash flows for the investment V. MARR. a. I, III, IV, and V only b. II, III, IV, and V only c. IV and V only d. All items (I, II, III, IV, and V).
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Market Top Investors, Incorporated, is considering the purchase of a $345, 000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight - line method, at which time it will be worth $78, 000. The computer will replace two office employees whose combined annual salaries are $89, 000. The machine will also immediately lower the firm's required net working capital by $78, 000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 23 percent. The appropriate discount rate is 11 percent. Calculate the NPV of this project
Chapter 13 Solutions
Engineering Economy (17th Edition)
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- You are evaluating a project that will require an investment of $15 million that will be depreciated over a period of 19 years. You are concerned that the corporate tax rate will increase during the life of the project. Would this increase the accounting break-even point? Would it increase the NPV break-even point?arrow_forwardLegacy Solution A21. Which of the following statement correctly describes 'depreciation' ? (a) It is a monthly allowance for wear and tear of a capital good. (b) It is based on the demand and supply of consumer goods in market. (c) It is calculated as the cost of good divided by number of years of its useful life. (d) It accounts for sudden destruction of capital caused due to natural calamities.arrow_forwardTaxes are costs, and, therefore, changes in tax rates can affect consumer prices, project lives, and the value of existing firms. Evaluate the change in taxation on the valuation of the following project: Assumptions: Tax depreciation is straight-line over three years. Pre-tax salvage value is 25 in Year 3 and 50 if the asset is scrapped in Year 2. Tax on salvage value is 40% of the difference between salvage value and book value of the investment. The cost of capital is 20%.The table is attached Please verify that the information above yields NPV = 0. If you decide to terminate the project in Year 2, what would be the NPV of the project? Suppose that the government now changes tax depreciation to allow a 100% write-off in Year 1. How does this affect your answers to parts a and b above?arrow_forward
- Plant Company is contemplating the purchase of a new piece of equipment for $40,000. Plant is in the 20% income tax bracket. Predicted annual after-tax cash inflows from this investment are $14,000, $12,000, $5,000, $13,000 and $1,000 for years 1 through 5, respectively. The firm uses straight-line depreciation with no residual value at the end of five years. The hurdle rate for accepting new capital investment projects is 4%, after-tax. The estimated accounting rate of return (ARR) on this project (rounded to two decimal points), based on the initial investment is: Multiple Choice 2.50%. 3.16%. 6.50%. 9.83%. 11.83%.arrow_forwardReplacement versus expansion cash flows- Tesla Systems has estimated the cash flows over the five-year lives of a project that will install new equipment to replace old equipment. If the firm makes this investment, it will sell the old equipment and receive after-tax proceeds of $1,551,000. If the firm decides not to undertake this project, the old equipment will remain in service and generate the cash flows listed in years 1 through 5, and it will have no value after five years. These cash flows are summarized in the following table: New equipment Old equipmentNew equipment cost -4,645,000 Year Operating cash flows 1 551,000 372,000 2 931,000 372,000 3 1,344,000 372,000 4 2,221,000 372,000 5 3,399,000 372,000 New Equipment Old Equipment New Equipment Cost -$4,645,000 Year Operating Cash Flows 1 $551,000 $372,000 2 $931,000 $372,000 3 $1,344,000 $372,000 4 $2,221,000 $372,000 5 $3,399,000…arrow_forwardTo open a new store, Solomon Tire Company plans to invest $306,000 in equipment expected to have a six-year useful life and no salvage value. Solomon expects the new store to generate annual cash revenues of $323,000 and to incur annual cash operating expenses of $186,000. Solomon's average income tax rate is 35 percent. The company uses straight-line depreciation. Required Determine the expected annual net cash inflow from operations for each of the first four years after Solomon opens the new store. (Negative amounts should be indicated by a minus sign.) Net cash Inflow/Outflow Year 1 Year 2 Year 3 Year 4arrow_forward
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