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Concept explainers
Case Summary:
LS Inc wants to acquire new market data and quotation system for its new home office. The system receives the information from online services and display the data onscreen or may save it for later retrieval and system also allow customers to make call and can convey current quotes. Cost of the equipment is $ 1,000,000 and if the company wants to purchase the equipment, they can borrow a loan at an interest rate of 10%.
Useful life of equipment is 6 years and it comes under 3 years MARCS class or it can purchase a contract of 4 years where $20,000 have to be paid at the beginning of each year and it will be sold after 4 years and the residual value is estimated at $200,000. They thought of opting for leasing which will cost $260,000 and includes maintenance cost. Federal plus state tax is 40%.
To discuss: The way the increased uncertainty of the residual value affect the LS Inc lease versus purchase decision.
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Chapter 19 Solutions
EBK FINANCIAL MANAGEMENT: THEORY & PRAC
- Now assume that the equipments residual value could be as low as 0 or as high as 400,000, but 200,000 is the expected value. Because the residual value is riskier than the other relevant cash flows, this differential risk should be incorporated into the analysis. Describe how this could be accomplished. (No calculations are necessary, but explain how you would modify the analysis if calculations were required.) What effect would the residual values increased uncertainty have on Lewis lease-versus-purchase decision?arrow_forwardWhich are problems of the payback criterion? Check all that apply: It ignores cash flows after the cutoff date. It ignores the time value of money. It doesn't show the value created by a project. It doesn't fully reflect the risk of a project. It uses an arbitrary cutoff value. It is difficult to calculate.arrow_forwardEhrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.arrow_forward
- Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. Select one: a. The lower the WACC used to calculate it, the lower the calculated NPV will be. b. If a project's NPV is greater than zero, then its IRR must be less than zero. c. The NPV of a relatively low-risk project should be found using a relatively high WACC. d. A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC. e. If a project's NPV is less than zero, then its IRR must be less than the WACC.arrow_forwardWhich of the following statements describing the elements of intrinsic valuation is most accurate? A.) When the present value of the cashflows is discounted with the appropriate rate and this present value is positive, then the asset providing these cashflows has a value to the investor. B.) The risk-free rate is the lowest rate that an investor can earn from short-term investments. C.) Cashflows may include depreciation expenses and amortization costs. D.) A simple calculation of present values of expected cashflows of different investments using the risk free rate would be enough to determine which asset is best.arrow_forwardWhen the present value of the cash inflows exceeds the initial cost of a project, then the project should be : A. rejected because NPV is negative. B. accepted because NPV is greater than 1. C. accepted because the profitability index is negative. D. rejected because the internal rate of return is negative.arrow_forward
- Which of the following is true of the cash payback period? a.the longer the payback, the longer the estimated life of the asset b.the longer the payback, the sooner the cash spent on the investment is recovered c.the shorter the payback, the less likely the possibility of obsolescence d.All of these answers are correct.arrow_forward3. In a comparison of the NPV and IRR techniques, which of the following is true? statements A. Both methods give the same accept or reject decision, regardless of the pattern of the cash flows. B. IRR is technically superior to NPV and easier to calculate. C. The NPV approach is superior if discount rates are expected to vary over the life of the project. D. NPV and accounting ROCE can be confused.arrow_forwardAn analysis of a proposal by the net present value method indicated that the present value of future cash inflows exceeded the amount to be invested. Which of the following statements best describes the results of this analysis? A)The proposal is undesirable, and the rate of return expected from the proposal is less than the minimum rate used for the analysis. B)The proposal is desirable, and the rate of return expected from the proposal exceeds the minimum rate used for the analysis. C)The proposal is undesirable, and the rate of return expected from the proposal exceeds the minimum rate used for the analysis. D)The proposal is desirable, and the rate of return expected from the proposal is less than the minimum rate used for the analysis.arrow_forward
- d. Consider the following statement "If an analyst decides to use real options methodology to value a project, estimating a standard Discounted Cash Flow model is useless". Do you agree with this statement? Explain your answer.arrow_forwardWhich is least likely correct about security valuation?a. The calculated or determined value considers the stream of future cash flows.b. The calculated or determined value equals the market price.c. The calculated or determined value considers the risks involved and the opportunity cost.d. The calculated or determined value allows the investors to evaluate whether a security isovervalued or undervalued.e. All of the abovearrow_forwardWhich of the following is a disadvantage of the IRR project evaluation method? Question 5Select one: a. It does not take into account the time value of money. b. If there are negative cash flows after positive cash flows, there may be zero or multiple internal rates of return. c. It does not make adequate allowance for risk. d. It focuses on accounting profit rather than cash flow as the source of value.arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
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