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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