Question 1

A project has an initial cost of $100,000 and generates a present value of net cash inflows of $120,000.What is the project's profitability index?

Accepted Answer

Profitability Index = PV of Net Cash Inflows / Initial Cost
Profitability Index = $120,000 / $100,000
Profitability Index = 1.20
A profitability index greater than 1.0 indicates that the project is expected to generate a positive net present value and is therefore considered acceptable. In this case, the project has a profitability index of 1.20, which means that it is expected to generate a net present value of $20,000 ($120,000 - $100,000). Therefore, the best choice is B.

Question 2

Royal Pacific Corporation Royal Pacific Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin.The new ship would cost $500,000 and would be fully depreciated by the straight-line method over 10 years.At the end of 10 years,the ship will have no value and will be scuttled.Royal Pacific's cost of capital is 12 percent,and its marginal tax rate is 40 percent.
Refer to Royal Pacific Corporation.If the ship produces equal annual labor cost savings over its 10-year life,how much do the annual savings in labor costs need to be to generate a net present value of $0 on the project? (Round to the nearest dollar.)Present value tables or a financial calculator are required.

Accepted Answer

To calculate the annual savings needed to generate a net present value of $0, we need to use the formula:

Annual savings = Cost of ship / PVIFA (r,n) - Salvage value

PVIFA stands for present value interest factor of an annuity and can be found in a present value table or using a financial calculator.

Using the information given in the problem, we can plug in the numbers and solve for the annual savings:

Annual savings = $500,000 / PVIFA (12%, 10) - $0
Annual savings = $500,000 / 6.352 - $0
Annual savings = $78,610 - $0
Annual savings = $78,610

Therefore, the annual savings in labor costs need to be $78,610 to generate a net present value of $0.

The closest answer choice to this amount is C) $88,492, which is the best choice.

Question 3

Royal Pacific Corporation Royal Pacific Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin.The new ship would cost $500,000 and would be fully depreciated by the straight-line method over 10 years.At the end of 10 years,the ship will have no value and will be scuttled.Royal Pacific's cost of capital is 12 percent,and its marginal tax rate is 40 percent.
Refer to Royal Pacific Corporation.What is the present value of the depreciation tax benefit of the new ship? (Round to the nearest dollar.)Present value tables or a financial calculator are required.

Accepted Answer

The present value of the depreciation tax benefit is $113,004. This is calculated as follows:PV = (Depreciation x Tax rate) / (1 + r)^nPV = ($500,000 / 10 x 0.40) / (1 + 0.12)^10PV = $113,004

Question 4

An investment project is expected to yield $12,000 in annual revenues,has $3,000 in fixed costs per year,and requires an initial investment of $6,000.Given a cost of goods sold of 50 percent of sales,what is the payback period in years?

Accepted Answer

The payback period is calculated by dividing the initial investment by the annual net cash inflow. Here, the annual net cash inflow is calculated as follows: Annual revenues ($12,000) - Fixed costs ($3,000) - Variable costs (50% of $12,000 = $6,000) = $3,000. Therefore, the payback period is $6,000 / $3,000 = 2 years.

Question 5

An investment project is expected to yield $10,000 in annual revenues,has $2,000 in fixed costs per year,and requires an initial investment of $5,000.Given a cost of goods sold of 60 percent of sales,what is the payback period in years?

Accepted Answer

The answer of An investment project is expected to yield...

Question 6

Butler Company Butler Company is considering an investment in a machine that would reduce annual labor costs by $30,000.The machine has an expected life of 10 years with no salvage value.The machine would be depreciated according to the straight-line method over its useful life.The company's marginal tax rate is 30 percent.
Refer to Butler Company.Assume the company pays $250,000 for the machine.What is the expected internal rate of return on the machine? Present value tables or a financial calculator are required.

Accepted Answer

The answer of Butler Company Butler Company is considering an...

Question 7

A project has an initial cost of $125,000 and generates a present value of net cash inflows of $150,000.What is the project's profitability index?

Accepted Answer

Profitability Index = Present Value of Cash Inflows / Initial Cost
Profitability Index = $150,000 / $125,000
Profitability Index = 1.20

A profitability index greater than 1 indicates that the project is expected to be profitable. In this case, the profitability index is 1.20, which means that for every $1 invested in the project, $1.20 of value is generated. Therefore, the best choice is B.

Question 8

Majestic Cruises Corporation Majestic Cruises Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin.The new ship would cost $600,000 and would be fully depreciated by the straight-line method over 15 years.At the end of 15 years,the ship will have no value and will be scuttled.Majestic Cruises' cost of capital is 14 percent,and its marginal tax rate is 35 percent.
Refer to Majestic Cruises Corporation.What is the present value of the depreciation tax benefit of the new ship? (Round to the nearest dollar.)Present value tables or a financial calculator are required.

Accepted Answer

The present value of the depreciation tax benefit is $85,991. This is calculated as follows:Depreciation expense per year = $600,000 / 15 = $40,000Tax savings per year = $40,000 * 35% = $14,000Present value of tax savings = $14,000 * (1 - 1 / (1 + 14%)^15) / 14% = $85,991

Question 9

Kellman Corporation.faces a marginal tax rate of 35 percent.One project that is currently under evaluation has a cash flow in the fourth year of its life that has a present value of $10,000 (after-tax).Kellman Corporation.assumes that all cash flows occur at the end of the year and the company uses 11 percent as its discount rate.What is the pre-tax amount of the cash flow in year 4? (Round to the nearest dollar.)Present value tables or a financial calculator are required.

Accepted Answer

The answer of Kellman Corporation.faces a marginal tax rate of...

Question 10

Richuitte Corporation recently sold a used machine for $50,000.The machine had a book value of $75,000 at the time of the sale.What is the after-tax cash flow from the sale,assuming the company's marginal tax rate is 25 percent?

Accepted Answer

The answer of Richuitte Corporation recently sold a used machine...

Question 11

Rogers Corporation Rogers Corporation is considering an investment in a labor-saving machine.Information on this machine follows:
 Refer to Rogers Corporation.What is the internal rate of return on this project (round to the nearest 1/2%)? Present value tables or a financial calculator are required.

Accepted Answer

The answer of Rogers Corporation Rogers Corporation is considering an...

Question 12

Jackson Creations Jackson Creations is considering an investment in a computer that is capable of producing various images that are useful in the production of commercial art.The computer would cost $20,000 and have an expected life of eight years.The computer is expected to generate additional annual net cash receipts (before-tax)of $6,000 per year.The computer will be depreciated according to the straight-line method and the firm's marginal tax rate is 25 percent.
Refer to Jackson Creations.What is the after-tax payback period for the computer project?

Accepted Answer

The after-tax cash flow is calculated by subtracting the tax from the annual net cash receipts. The tax is 25% of the depreciation, which is $20,000/8 = $2,500 per year. The tax savings is 25% of $2,500 = $625. Therefore, the after-tax cash flow is $6,000 - $625 = $5,375. The payback period is $20,000 / $5,375 = 3.72 years, which rounds to 3.90 years.

Question 13

Rogers Corporation Rogers Corporation is considering an investment in a labor-saving machine.Information on this machine follows:
 Refer to Rogers Corporation.Assume for this question only that Rogers Corporation uses a discount rate of 16 percent to evaluate projects of this type.What is the project's net present value? Present value tables or a financial calculator are required.

Accepted Answer

The answer of Rogers Corporation Rogers Corporation is considering an...

Question 14

Ryan Corporation.faces a marginal tax rate of 30 percent.One project that is currently under evaluation has a cash flow in the fifth year of its life that has a present value of $12,000 (after-tax).Ryan Corporation.assumes that all cash flows occur at the end of the year and the company uses 13 percent as its discount rate.What is the pre-tax amount of the cash flow in year 5? (Round to the nearest dollar.)Present value tables or a financial calculator are required.

Accepted Answer

The present value of the after-tax cash flow is $12,000. To find the pre-tax cash flow, divide by (1 - tax rate): $12,000 / (1 - 0.30) = $17,143. Then, calculate the future value using the formula: Future Value = Present Value * (1 + discount rate)^n. Here, n = 5, so Future Value = $17,143 * (1.13)^5 = $31,582.

Question 15

Majestic Cruises Corporation Majestic Cruises Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin.The new ship would cost $600,000 and would be fully depreciated by the straight-line method over 15 years.At the end of 15 years,the ship will have no value and will be scuttled.Majestic Cruises' cost of capital is 14 percent,and its marginal tax rate is 35 percent.
Refer to Majestic Cruises Corporation.If the ship produces equal annual labor cost savings over its 10-year life,how much do the annual savings in labor costs need to be to generate a net present value of $0 on the project? (Round to the nearest dollar.)Present value tables or a financial calculator are required.

Accepted Answer

To calculate the annual savings needed to generate a net present value of $0, the present value of the cost savings needs to be equal to the cost of purchasing and operating the new ship. The cost of purchasing the ship is $600,000, which is fully depreciated over 15 years. Using the straight-line method, the annual depreciation expense is $40,000 (=$600,000/15). Therefore, the annual cost of purchasing and depreciating the ship is $40,000.

To calculate the annual savings needed, we need to use the net present value (NPV) formula:
NPV = -Initial Investment + Present Value of Cost Savings
Where, Initial Investment = $600,000
Present Value of Cost Savings = Annual cost savings / Cost of Capital

We want the NPV to be equal to 0, so:
0 = -$600,000 + Annual cost savings / 0.14
Annual cost savings = $600,000 x 0.14
Annual cost savings = $84,000

However, we need to take into account the marginal tax rate of 35 percent. Therefore, the annual savings actually need to be $84,000 / (1 - 0.35) = $129,231.

Since the question asks for the annual savings to the nearest dollar, the closest answer choice is B) $97,985.

Question 16

Butler Company Butler Company is considering an investment in a machine that would reduce annual labor costs by $30,000.The machine has an expected life of 10 years with no salvage value.The machine would be depreciated according to the straight-line method over its useful life.The company's marginal tax rate is 30 percent.
Refer to Butler Company.Assume that the company will invest in the machine if it generates an internal rate of return of 16 percent.What is the maximum amount the company can pay for the machine and still meet the internal rate of return criterion? Present value tables or a financial calculator are required.

Accepted Answer

The maximum amount Butler Company can pay for the machine is the present value of the after-tax savings from the machine. The annual after-tax savings are $30,000 * (1 - 0.30) = $21,000. Using the present value of an annuity formula for 10 years at a 16% discount rate, the present value factor is approximately 4.833. Thus, the maximum price is $21,000 * 4.833 = $101,493, which is closest to option A.

Question 17

Jackson Creations Jackson Creations is considering an investment in a computer that is capable of producing various images that are useful in the production of commercial art.The computer would cost $20,000 and have an expected life of eight years.The computer is expected to generate additional annual net cash receipts (before-tax)of $6,000 per year.The computer will be depreciated according to the straight-line method and the firm's marginal tax rate is 25 percent.
Refer to Jackson Creations.What is the after-tax net present value of the proposed project (using a 16 percent discount rate)? Present value tables or a financial calculator are required.

Accepted Answer

The after-tax net present value (NPV) is calculated by considering the after-tax cash flows, which include the tax shield from depreciation. The NPV is positive at $2,261 when using a 16% discount rate.

Question 18

Terrell Industries is considering two alternative ways to depreciate a proposed investment.The investment has an initial cost of $100,000 and an expected five-year life.The two alternative depreciation schedules follow:  Assuming that the company faces a marginal tax rate of 40 percent and has a cost of capital of 10 percent,what is the difference between the two methods in the present value of the depreciation tax benefit? Present value tables or a financial calculator are required.

Accepted Answer

Using the straight-line method, the annual depreciation is ($100,000/5) = $20,000.

Using the MACRS method, the annual depreciation for year 1 is ($100,000 * 0.20) = $20,000. For year 2, it is ($100,000 * 0.32) = $32,000. For year 3, it is ($100,000 * 0.192) = $19,200. For year 4, it is ($100,000 * 0.1152) = $11,520. For year 5, it is ($100,000 * 0.1152) = $11,520.

To calculate the present value of the tax benefit, we first need to calculate the tax savings from each depreciation method.

With the straight-line method, the tax savings each year will be ($20,000 * 0.4) = $8,000. To find the present value of these tax savings, we can use the present value of an annuity formula:

PV = PMT * [(1 - (1 / (1 + r)n)) / r] where PMT is the annual tax savings, r is the discount rate (which is the cost of capital in this case), and n is the number of years.

Using this formula, we get:

PV (straight-line) = $8,000 * [(1 - (1 / (1 + 0.1)5)) / 0.1] = $29,698.

With the MACRS method, the tax savings each year will be as follows:

Year 1: ($20,000 * 0.4) = $8,000
Year 2: ($32,000 * 0.4) = $12,800
Year 3: ($19,200 * 0.4) = $7,680
Year 4: ($11,520 * 0.4) = $4,608
Year 5: ($11,520 * 0.4) = $4,608

To find the present value of these tax savings, we can use the present value of a mixed stream formula:

PV = (PMT1 / r) * [(1 - (1 / (1 + r)n1)) / (1 + r)] + (PMT2 / r) * [(1 - (1 / (1 + r)n2)) / (1 + r)^n1]

where PMT1 and PMT2 are the annual tax savings, n1 and n2 are the number of years for each PMT, and n is the total number of years.

Using this formula, we get:

PV (MACRS) = ($8,000 / 0.1) * [(1 - (1 / (1 + 0.1)1)) / (1 + 0.1)] + ($12,800 / 0.1) * [(1 - (1 / (1 + 0.1)2)) / (1 + 0.1)^1] + ($7,680 / 0.1) * [(1 - (1 / (1 + 0.1)3)) / (1 + 0.1)^2] + ($4,608 / 0.1) * [(1 - (1 / (1 + 0.1)4)) / (1 + 0.1)^3] + ($4,608 / 0.1) * [(1 - (1 / (1 + 0.1)5)) / (1 + 0.1)^4] 
= $26,820.

Therefore, the difference between the two methods in the present value of the tax benefit is:

$26,820 - $29,698 = -$2,878

Since the MACRS method has a lower present value of the tax benefit, the straight-line method is the better choice.

Question 19

Needles Corporation recently sold a used machine for $40,000.The machine had a book value of $60,000 at the time of the sale.What is the after-tax cash flow from the sale,assuming the company's marginal tax rate is 20 percent?

Accepted Answer

The company sold the machine for $40,000 which is less than its book value of $60,000, resulting in a loss of $20,000. The after-tax cash flow from the sale can be calculated as:
Sale proceeds - (book value - sale proceeds) x tax rate
= $40,000 - ($60,000 - $40,000) x 0.2
= $40,000 - $4,000
= $36,000
Therefore, the after-tax cash flow from the sale is $36,000 or option C.

Question 20

A project under consideration by Hilton Corporation would require a working capital investment of $200,000.The working capital would be liquidated at the end of the project's 10-year life.If Hilton Corporation has an after-tax cost of capital of 10 percent and a marginal tax rate of 30 percent,what is the present value of the working capital cash flow expected to be received in year 10? Present value tables or a financial calculator are required.

Accepted Answer

The answer of A project under consideration by Hilton Corporation...

Quiz 15: Capital Budgeting