HDR 15th Chapter 21 Hwk C(1) (2)

HDR 15th Chapter 21 Hwk C(1) (2) - 21-18(25 min Capital...

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21-18 (25 min.) Capital budgeting methods, no income taxes. The table for the present value of annuities (Appendix A, Table 4) shows: 10 periods at 14% = 5.216 1a. Net present value = $28,000 (5.216) – $110,000 = $146,048 – $110,000 = $36,048 b. Payback period = 000 , 28 $ 000 , 110 $ = 3.93 years c. For a $110,000 initial outflow, the project generates $28,000 in cash flows at the end of each of years one through ten. Using either a calculator or Excel, the internal rate of return for this stream of cash flows is found to be 21.96%. d. Accrual accounting rate of return based on net initial investment: Net initial investment = $110,000 Estimated useful life = 10 years Annual straight-line depreciation = $110,000 ÷ 10 = $11,000 Accrual accounting rate of return = 000 , 110 $ 000 , 11 $ 000 , 28 $ = 000 , 110 $ 000 , 17 $ = 15.45% e. Accrual accounting rate of return based on average investment: Average investment = ($110,000 + $0) / 2 = $55,000 Accrual accounting rate of return = $28,000 $11,000 $55,000 = 30.91% . 2. Factors City Hospital should consider include the following: a. Quantitative financial aspects b. Qualitative factors, such as the benefits to its customers of a better eye-testing machine and the employee-morale advantages of having up-to-date equipment c. Financing factors, such as the availability of cash to purchase the new equipment 21-1
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21-19 (35 min.) Capital budgeting, income taxes. 1a. Net after-tax initial investment = $110,000 Annual after-tax cash flow from operations (excluding the depreciation effect): Annual cash flow from operation with new machine $28,000 Deduct income tax payments (30% of $28,000) 8,400 Annual after-tax cash flow from operations $19,600 Income tax cash savings from annual depreciation deductions 30% $11,000 $3,300 These three amounts can be combined to determine the NPV: Net initial investment; $110,000 1.00 $(110,000) 10-year annuity of annual after-tax cash flows from operations; $19,600 5.216 102,234 10-year annuity of income tax cash savings from annual depreciation deductions; $3,300 5.216 17,213 Net present value $ 9,447 b. Payback period = ) 300 , 3 $ 600 , 19
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