MANAGERIAL ACCT.F/MANAGERS>CUSTOM<
4th Edition
ISBN: 9781307090147
Author: Noreen
Publisher: MCG/CREATE
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Chapter 8C, Problem 8C.1E
To determine
Concept Introduction:
The
The net present value of the investment.
Expert Solution & Answer
Answer to Problem 8C.1E
The net present value of the investment is $145,511.
Explanation of Solution
The net present value of the investment is calculated as follows:
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Initial investment (I) | $ (2,000,000) | |||||
| Net operating income (A) | $ 300,000 | $ 300,000 | $ 300,000 | $ 300,000 | $ 300,000 | |
| Income tax (B) = (A*30%) | $ 90,000 | $ 90,000 | $ 90,000 | $ 90,000 | $ 90,000 | |
| Income after tax (C) = (A-B) | $ 210,000 | $ 210,000 | $ 210,000 | $ 210,000 | $ 210,000 | |
| $ 400,000 | $ 400,000 | $ 400,000 | $ 400,000 | $ 400,000 | ||
| Cash inflows after tax (E) = (C+D) | $ 610,000 | $ 610,000 | $ 610,000 | $ 610,000 | $ 610,000 | |
| Net cash flows (F) = (I+E) | $ (2,000,000) | $ 610,000 | $ 610,000 | $ 610,000 | $ 610,000 | $ 610,000 |
| PV of $ 1(13%) (G) | 1.00000 | 0.88496 | 0.78315 | 0.69305 | 0.61332 | 0.54276 |
| PV = F*G | $ (2,000,000) | $ 539,823 | $ 477,719 | $ 422,761 | $ 374,124 | $ 331,084 |
| Net present value (Sum of PVs) | $ 145,511 |
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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.
Q3 7d
7. XYZ Co. is evaluating whether to invest in a project with the following information:
Project cost = $950,000
Project life = five years
Projected number of units sold per year = 10,000
Projected price per unit = $200
Projected variable cost per unit = 150
Fixed costs per year = $150,000
Required rate of return = 15%
Marginal tax rate = 35%
Assume straight-line depreciation to zero over five years, and ignore the half-year rule for accounting for depreciation.
d. Calculate the Degree of Operating Leverage (DOL) at the cash break-even, accounting break-even, and financial break-even sales quantities.
4a4) New equipment costs $645,000 and is expected to last for four years with no salvage value. During this time, the company will use a 30% CCA rate. The new equipment will save $155,000 annually before taxes. If the company's required rate of return is 12%, determine the PVCCATS of the purchase. Assume the half-year rule applies and a tax rate of 33%.
Chapter 8C Solutions
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