Question

Welch Corporation is planning an investment with the following characteristics (Ignore income taxes.): Useful life 7 years Yearly net cash inflow $ 90,000 Salvage value $ 0 Internal rate of return 11 % Required rate of return 7 % Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided. The initial cost of the equipment is closest to: Multiple Choice $540,100 $424,080

Answer 1

Answer:

The initial cost of the equipment is closest to $424,080

Explanation:

Using the given information in the question, the evaluation of the question is thus,

Useful life of the investment = 7 years.

Yearly net cash inflow = $90,000.

Salvage value = $0

Internal rate of return= 11%.

Required rate of return = 7%.

During the analysis, a Present Value Factor Table will be used.

For each of the years, the net cash inflow is $90,000 and using the Present Value Factor table, we can determine the net present value. With the internal rate of return set at 11%, our present value for year 1 is $81,081 with its present value factor being 0.9009.

For year two, the present value is $73,044 with our present value factor being 0.8116

For year three, the present value is $65,808 with our present value factor being 0.7312.

For year four, the present value is $59,283 with our present value factor being 0.6587.

For year five, the present value is $53,415 with our present value factor being 0.5935.

For year six, the present value is $48,114 with our present value factor being 0.5346.

For year seven, the present value is $43,353 with our present value factor being 0.4817.

When all the present values are added, the sum is $424,098 which is closest to $424,080.

Answer 2

Answer:

Explanation:

$540,100

$424,080

Cannot be determined from the given information.The internal rate of return is the rate of return at which the net present value of the project is zero.

Net present value = −Investment required + (Net annual cash inflow × Present value factor of an annuity for 7 years at 12%)$0 = -Investment required + ($70,000 × 4.564)

Investment required = $70,000 × 4.564 = $319,480

Welch Corporation is considering a capital budgeting project that would require investing $360,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $730,000 and annual incremental cash operating expenses would be $517,000. The project would also require a one-time renovation cost of $145,000 in year 3. The company's income tax rate is 30% and its after-tax discount rate is 12%. The company uses straight-line depreciation. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The income tax expense in year 2 is:$6,900$27,900$36,900$57,900Depreciation expense = (Original cost - Salvage value) ÷ Useful life= ($360,000 - $0) ÷ 4 years = $90,000 per yearYear 2Calculate the annual tax expense:Sales$730,000 Cash operating expenses$ (517,000)Depreciation expense$(90,000)Incremental net income$123,000 Tax rate 30%Income tax expense$(36,900)Zangari Corporation has provided the following information concerning a capital budgeting project:

After-tax discount rate15 %Tax rate35 %Expected life of the project4 yearsInvestment required in equipment$160,000

Salvage value of equipment$0 Annual sales$696,000

Annual cash operating expenses$532,000

One-time renovation expense in year 3$32,500

The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The income tax expense in year 3 is:

$49,525$32,025$74,025$39,025D

epreciation expense = (Original cost − Salvage value) ÷ Useful life= ($160,000 − $0) ÷ 4 years = $40000 per yearYear 3Calculate the annual tax expense:Sales$ 696,000 Cash operating expenses$(532,000)One-time expense$ (32,500)Depreciation expense$ (40,000)Incremental net income$91,500 Tax rate35%Income tax expense$ (32,025)Dekle Corporation has provided the following information concerning a capital budgeting project:Click here to view Exhibit 8B-1and Exhibit 8B-2to determine the appropriate discount factor(s) using tables.