CONNECT ONLINE ACCESS F/MANAGERIAL ACC.
6th Edition
ISBN: 9781264445356
Author: Noreen
Publisher: MCG
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Chapter 7C, Problem 7C.4P
To determine
Concept Introduction:
Taxes are the amount paid by the business to the government.
Requirement-1:
To Calculate:
Taxes Paid.
To determine
Concept Introduction:
Net present value: It is the net inflow from the project which is calculated after considering the taxes and present value factor. It is calculated by reducing the net cash outflow from the net cash inflow. NPV helps in decision making regarding a project.
Taxes are the amount paid by the business to the government.
Requirement-2:
To Calculate:
Net Present Value.
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Income Taxes and Net Present Value Analysis
Rosman Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. Alter careful study, Rosman estimated the following costs and revenues for the project:
The new piece of equipment mentioned above has a useful life of five years and zero salvage value. The old piece of equipment mentioned above would be sold at the beginning of the project and there would be no gain or loss realized on its sale. Rosman uses the straight-line depreciation method for financial reporting and tax purposes. The company’s tax rate is 30% and its after-tax cost of capital is 12%. When the project concludes in five years the working capital will be released for investment elsewhere within the company.
Required:
1. Calculate the annual income tax expense for each of years 1 through 5 that will arise as a result of this investment opportunity.
2. Calculate the net present value of this investment opportunity.
Cardinal Company is considering a five-year project that would require a $3,025,000 investment in equipment with a
useful life of five years and no salvage value. The company's discount rate is 16%. The project would provide net operating
income in each of five years as follows:
Sales
Variable expenses
Contribution margin
Fixed expenses:
Advertising, salaries, and other out-
of-pocket costs
Depreciation
Total fixed expenses
Net operating income
$610,000
605,000
Simple rate of return
(Hint: Use Microsoft Excel to calculate the discount factor(s).)
%
$2,737,000
1,001,000
1,736,000
7. What is the project's simple rate of return for each of the five years? (Round your answer to 2 decimal places. i.e. 0.12342 should
be considered as 12.34%.)
1,215,000
$ 521,000
Net Present Value Analysis
The management of Kunkel Company is considering the purchase of a $27,000 machine that would reduce operating costs by $7,000 per year. At the end of the machine’s five-year useful life, it will have zero salvage value. The company’s required rate of return is 12%.
Required:
1. Determine the net present value of the investment in the machine.
2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?
Chapter 7C Solutions
CONNECT ONLINE ACCESS F/MANAGERIAL ACC.
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