A company is considering purchasing an asset for

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A company is considering purchasing an asset for $70,000 that would have a usefullife of 5 years and would have a salvage value of $12,000. For tax purposes, the entireoriginal cost of the asset would be depreciated over 5 years using the straight-linemethod and the salvage value would be ignored. The asset would generate annual netcash inflows of $22,000 throughout its useful life. The project would requireadditional working capital of $8,000, which would be released at the end of theproject. The company's tax rate is 40% and its discount rate is 9%.Required:What is the net present value of the asset?Ans:YearsAmountTaxEffectCost of asset........................Now($70,000)Working capital needed......Now($8,000)Net annual cash inflows......1-5$22,0000.60Depreciation tax shield.......1-5$14,0000.40Salvage value......................5$12,0000.60Working capital released....5$8,000Net present value................After-TaxCashFlows9%FactorPresentValueCost of asset........................($70,000)1.000($70,000)Working capital needed......($8,000)1.000(8,000)Net annual cash inflows......$13,2003.89051,348Depreciation tax shield.......$5,6003.89021,784Salvage value......................$7,2000.6504,680Working capital released....$8,0000.6505,200Net present value................$5,012AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: ReportingAppendix: 14CLO: 8Level: MediumGarrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition14-97
Chapter 14Capital Budgeting Decisions157.Management is considering purchasing an asset for $40,000 that would have a usefullife of 8 years and no salvage value. For tax purposes, the entire original cost of theasset would be depreciated over 8 years using the straight-line method. The assetwould generate annual net cash inflows of $20,000 throughout its useful life. Theproject would require additional working capital of $5,000, which would be releasedat the end of the project. The company's tax rate is 40% and its discount rate is 12%.Required:What is the net present value of the asset?Ans:YearsAmountTaxEffectCost of asset........................Now($40,000)Working capital needed......Now($5,000)Net annual cash inflows......1-8$20,0000.60Depreciation tax shield.......1-8$5,0000.40Working capital released.....8$5,000Net present value.................After-TaxCashFlows12%FactorPresentValueCost of asset........................($40,000)1.000($40,000)Working capital needed......($5,000)1.000(5,000)Net annual cash inflows......$12,0004.96859,616Depreciation tax shield.......$2,0004.9689,936Working capital released.....$5,0000.4042,020Net present value.................$26,572AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: ReportingAppendix: 14CLO: 8Level: Medium14-98Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Chapter 14Capital Budgeting Decisions158.Belling Inc. has provided the following data concerning a proposed investmentproject:Initial investment...............$168,000Annual cash receipts..........$126,000Life of the project...............9 yearsAnnual cash expenses........$50,000Salvage value.....................$8,000The company's tax rate is 30%. For tax purposes, the entire initial investment withoutany reduction for salvage value will be depreciated over 7 years. The company uses adiscount rate of 14%.

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Term
Summer
Professor
LEITER

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