B 6970 c 17350 d 8600 283 cso 2e2a los 2e2a an

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b. $(6,970). c. $(17,350). d. $8,600. 283. CSO: 2E2a LOS: 2E2a An investment decision is acceptable if the a. net present value is greater than or equal to $0. b. present value of cash inflows is less than the present value of cash outflows. c. present value of cash outflows is greater than or equal to $0. d. present value of cash inflows is greater than or equal to $0.
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259 284. CSO: 2E2a LOS: 2E2b Verla Industries is trying to decide which one of the following two options to pursue. Either option will take effect on January 1st of the next year. Option One - Acquire a New Finishing Machine. The cost of the machine is $1,000,000 and will have a useful life of five years. Net pre-tax cash flows arising from savings in labor costs will amount to $100,000 per year for five years. Depreciation expense will be calculated using the straight-line method for both financial and tax reporting purposes. As an incentive to purchase, Verla will receive a trade-in allowance of $50,000 on their current fully depreciated finishing machine. Option Two - Outsource the Finishing Work. Verla can outsource the work to LM Inc. at a cost of $200,000 per year for five years. If they outsource, Verla will scrap their current fully depreciated finishing machine. Verla’s effective income tax rate is 40%. The weighted-average cost of capital is 10%. The net present value of outsourcing the finishing work is a. $303,280 net cash outflow. b. $404,920 net cash outflow. c. $454,920 net cash outflow. d. $758,200 net cash outflow. 285. CSO: 2E2a LOS: 2E2b Long Inc. is analyzing a $1 million investment in new equipment to produce a product with a $5 per unit margin. The equipment will last 5 years, be depreciated on a straight-line basis for tax purposes, and have no value at the end of its life. A study of unit sales produced the following data. Annual Unit Sales Probability 80,000 .10 85,000 .20 90,000 .30 95,000 .20 100,000 .10 110,000 .10 If Long utilizes a 12% hurdle rate and is subject to a 40% effective income tax rate, the expected net present value of the project would be a. $261,750. b. $283,380. c. $297,800. d. $427,580.
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260 286. CSO: 2E2a LOS: 2E2b Fred Kratz just completed a capital investment analysis for the acquisition of new material handling equipment. The equipment is expected to cost $1,000,000 and be used for eight years. Kratz reviewed the net present value (NPV) analysis with Bill Dolan, Vice President of Finance. The analysis shows that the tax shield for this investment has a positive NPV of $200,000, using the firm’s hurdle rate of 20%. Dolan noticed that 8 year straight-line depreciation was used for tax purposes but, since this equipment qualifies for 3-year MACRS treatment, the tax shield analysis should be revised. The company has an effective tax rate of 40%. The MACRS rates for 3-year property are as follows. Year Rate 1 33.33% 2 44.45% 3 14.81% 4 7.41% Accordingly, the revised NPV for the tax shield (rounded to the nearest thousand) should be a. $109,000.
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