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Garrison - Chapter 14 Capital Budgeting Decisions

Essay Questions
132. (Ignore income taxes in this problem.) Cooney Inc. has provided the following data concerning a
proposed investment project:
Initial investment............... $160,000
Life of the project...............
7 years
Annual net cash inflows..... $40,000
Salvage value..................... $16,000
The company uses a discount rate of 17%.
Required:
Compute the net present value of the project.
Ans:
Initial investment...............
Annual net cash receipts....
Salvage value.....................
Net present value................
AACSB: Analytic
Level: Easy

Year(s)
Amount 17% Factor
PV
Now ($160,000)
1.000
($160,000)
1-7
$40,000
3.922
156,880
7
$16,000
0.333
5,328
$ 2,208

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 1

133. (Ignore income taxes in this problem.) Strausberg Inc. is considering investing in a project that
would require an initial investment of $270,000. The life of the project would be 6 years. The
annual net cash inflows from the project would be $81,000. The salvage value of the assets at the
end of the project would be $27,000. The company uses a discount rate of 10%.
Required:
Compute the net present value of the project.
Ans:
Initial investment...............
Annual net cash receipts....
Salvage value.....................
Net present value................
AACSB: Analytic
Level: Easy

Year(s)
Amount 10% Factor
PV
Now ($270,000)
1.000
($270,000)
1-6
$81,000
4.355
352,755
6
$27,000
0.564
15,228
$ 97,983

AICPA BB: Critical Thinking

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

AICPA FN: Reporting

LO: 1
14-7

134. (Ignore income taxes in this problem.) Tiff Corporation has provided the following data concerning
a proposed investment project:
Initial investment..................
Life of the project..................
Working capital required.......
Annual net cash inflows........
Salvage value........................

$960,000
6 years
$20,000
$288,000
$144,000

The company uses a discount rate of 16%. The working capital would be released at the end of the
project.
Required:
Compute the net present value of the project.
Ans:
Initial investment.....................
Annual net cash inflows...........
Working capital invested..........
Working capital released..........
Salvage value...........................
Net present value......................
AACSB: Analytic
Level: Easy

Year(s)
Amount 16% Factor
Now ($960,000)
1.000
1-6
$288,000
3.685
Now
($20,000)
1.000
6
$20,000
0.410
6
$144,000
0.410

AICPA BB: Critical Thinking

PV
($ 960,000)
1,061,280
(20,000)
8,200
59,040
$ 148,520

AICPA FN: Reporting

LO: 1

135. (Ignore income taxes in this problem.) Mattice Corporation is considering investing $490,000 in a
project. The life of the project would be 7 years. The project would require additional working
capital of $34,000, which would be released for use elsewhere at the end of the project. The annual
net cash inflows would be $123,000. The salvage value of the assets used in the project would be
$49,000. The company uses a discount rate of 11%.
Required:
Compute the net present value of the project.
Ans:
Initial investment...............
Annual net cash inflows.....
Working capital invested....
Working capital released....
Salvage value.....................
14-8

Year(s)
Amount 11% Factor
PV
Now ($490,000)
1.000
($490,000)
1-7
$123,000
4.712
579,576
Now
($34,000)
1.000
(34,000)
7
$34,000
0.482
16,388
7
$49,000
0.482
23,618
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Net present value................

$ 95,582

136. (Ignore income taxes in this problem.) Wary Corporation is considering the purchase of a
machine that would cost $240,000 and would last for 9 years. At the end of 9 years, the machine
would have a salvage value of $29,000. The machine would reduce labor and other costs by
$63,000 per year. The company requires a minimum pretax return of 19% on all investment
projects.
Required:
Determine the net present value of the project. Show your work!
Ans:
Annual cost savings.....
Initial investment.........
Salvage value...............
Net present value..........
AACSB: Analytic
Level: Easy

Year(s)
Amount 19% Factor
1-9
$63,000
4.163
Now ($240,000)
1.000
9
$29,000
0.209

AICPA BB: Critical Thinking

PV
$262,269
(240,000)
6,061
$ 28,330

AICPA FN: Reporting

LO: 1

137. (Ignore income taxes in this problem.) The management of Kinion Corporation is considering the
purchase of a machine that would cost $170,000, would last for 7 years, and would have no salvage
value. The machine would reduce labor and other costs by $50,000 per year. The company requires
a minimum pretax return of 17% on all investment projects.
Required:
Determine the net present value of the project. Show your work!
Ans:
Annual cost savings.....
Initial investment.........
Net present value..........
AACSB: Analytic
Level: Easy

Year(s)
Amount
17% Factor
1-7
$50,000
3.922
Now ($170,000)
1.000

AICPA BB: Critical Thinking

PV
$196,100
( 170,000)
$ 26,100

AICPA FN: Reporting

LO: 1

138. (Ignore income taxes in this problem.) Joanette, Inc., is considering the purchase of a machine that
would cost $240,000 and would last for 5 years, at the end of which, the machine would have a
salvage value of $48,000. The machine would reduce labor and other costs by $62,000 per year.
Additional working capital of $7,000 would be needed immediately, all of which would be
recovered at the end of 5 years. The company requires a minimum pretax return of 17% on all
investment projects.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

14-9

Required:
Determine the net present value of the project. Show your work!
Ans:
Initial investment...............
Working capital needed......
Annual cost savings...........
Working capital released....
Salvage value.....................
Net present value................
AACSB: Analytic
Level: Easy

Year(s)
Amount 17% Factor
PV
Now ($240,000)
1.000
($240,000)
Now
($7,000)
1.000
(7,000)
1-5
$62,000
3.199
198,338
5
$7,000
0.456
3,192
5
$48,000
0.456
21,888
($ 23,582)

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 1

139. (Ignore income taxes in this problem.) The management of Harling Corporation is considering the
purchase of a machine that would cost $90,504 and would have a useful life of 5 years. The
machine would have no salvage value. The machine would reduce labor and other operating costs
by $27,000 per year.
Required:
Determine the internal rate of return on the investment in the new machine. Show your work!
Ans:
Factor of the internal rate of return
= Investment required Net annual cash inflow = $90,504 $27,000 = 3.352
The factor of 3.352 for 5 years represents an internal rate of return of 15%.
AACSB: Analytic
Level: Easy

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 2

140. (Ignore income taxes in this problem.) Maxcy Limos, Inc., is considering the purchase of a
limousine that would cost $187,335, would have a useful life of 9 years, and would have no salvage
value. The limousine would bring in cash inflows of $45,000 per year in excess of its cash operating
costs.
Required:
Determine the internal rate of return on the investment in the new limousine. Show your work!
Ans:
14-10

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Factor of the internal rate of return


= Investment required Net annual cash inflow = $187,335 $45,000 = 4.163
The factor of 4.163 for 9 years represents an internal rate of return of 19%.
AACSB: Analytic
Level: Easy

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 2

141. (Ignore income taxes in this problem.) The management of Zachery Corporation is considering the
purchase of a automated molding machine that would cost $203,255, would have a useful life of 5
years, and would have no salvage value. The automated molding machine would result in cash
savings of $65,000 per year due to lower labor and other costs.
Required:
Determine the internal rate of return on the investment in the new automated molding machine.
Show your work!
Ans:
Factor of the internal rate of return
= Investment required Net annual cash inflow = $203,255 $65,000 = 3.127
The factor of 3.127 for 5 years represents an internal rate of return of 18%.
AACSB: Analytic
Level: Easy

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 2

142. (Ignore income taxes in this problem.) The management of an amusement park is considering
purchasing a new ride for $60,000 that would have a useful life of 15 years and a salvage value of
$8,000. The ride would require annual operating costs of $26,000 throughout its useful life. The
company's discount rate is 10%. Management is unsure about how much additional ticket revenue
the new ride would generate-particularly since customers pay a flat fee when they enter the park
that entitles them to unlimited rides. Hopefully, the presence of the ride would attract new
customers.
Required:
How much additional revenue would the ride have to generate per year to make it an attractive
investment?
Ans:
Years Amount 10%Factor Present Value
Cost of asset....................... Now $(60,000)
1.000
($ 60,000)
Annual operating costs....... 1-15 $(26,000)
7.606
( 197,756)
Salvage value.....................
15
$8,000
0.239
1,912
Net present value................
($255,844)
$255,844 7.606 = $33,637 additional revenue per year would be necessary to justify the
investment. This much additional revenue would result in a zero net present value. Any less than
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

14-11

this and the net present value would be negative. Any more than this and the net present value
would be positive.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3
Level: Hard
143. (Ignore income taxes in this problem.) Devon Corporation uses a discount rate of 8% in its capital
budgeting. Partial analysis of an investment in automated equipment with a useful life of 8 years
has thus far yielded a net present value of -$496,541. This analysis did not include any estimates of
the intangible benefits of automating this process nor did it include any estimate of the salvage
value of the equipment.
Required:
a. Ignoring any salvage value, how large would the additional cash flow per year from the
intangible benefits have to be to make the investment in the automated equipment financially
attractive?
b. Ignoring any cash flows from intangible benefits, how large would the salvage value of the
automated equipment have to be to make the investment in the automated equipment financially
attractive?
Ans:
a. Minimum annual cash flows from the intangible benefits
= Negative net present value to be offset Present value factor
= $496,541 5.747 = $86,400
b. Minimum salvage value
= Negative net present value to the offset Present value factor
= $496,541 0.540 = $919,520
AACSB: Analytic
Level: Easy

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 3

144. (Ignore income taxes in this problem.) The management of Crosson Corporation is investigating the
purchase of a new satellite routing system with a useful life of 9 years. The company uses a
discount rate of 17% in its capital budgeting. The net present value of the investment, excluding its
intangible benefits, is -$173,055.
Required:
How large would the additional cash flow per year from the intangible benefits have to be to make
the investment in the automated equipment financially attractive?
Ans:
Minimum annual cash flows from the intangible benefits
= Negative net present value to be offset Present value factor
= $173,055 4.451 = $38,880
AACSB: Analytic
14-12

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 3

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Level: Easy
145. (Ignore income taxes in this problem.) Chipps Corporation uses a discount rate of 9% in its capital
budgeting. Management is considering an investment in telecommunications equipment with a
useful life of 5 years. Excluding the salvage value of the equipment, the net present value of the
investment in the equipment is -$530,985.
Required:
How large would the salvage value of the telecommunications equipment have to be to make the
investment in the telecommunications equipment financially attractive?
Ans:
Minimum salvage value
= Negative net present value to the offset Present value factor
= $530,985 0.650 = $816,900
AACSB: Analytic
Level: Easy

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 3

146. (Ignore income taxes in this problem.) Choudhury Corporation is considering the following three
investment projects:
Investment required.......................
Present value of cash inflows.........

Project H Project I Project J


$11,000 $53,000 $89,000
$12,980 $61,480 $96,120

Required:
Rank the investment projects using the project profitability index. Show your work
Ans:
Investment required (a).........................
Present value of cash inflows...............
Net present value (b).............................
Project profitability index (b) (a).......
Ranked by project profitability index...
AACSB: Analytic
Level: Easy

Project H Project I Project J


($11,000) ($53,000) ($89,000)
12,980
61,480
96,120
$ 1,980
$ 8,480
$ 7,120
0.18
0.16
0.08
1
2
3

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 4

147. (Ignore income taxes in this problem.) The management of Winstead Corporation is considering the
following three investment projects:
Investment required.......................

Project Q Project R Project S


$14,000 $48,000 $74,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

14-13

Present value of cash inflows.........

$14,140

$54,720

$82,140

The only cash outflows are the initial investments in the projects.
Required:
Rank the investment projects using the project profitability index. Show your work
Ans:
Project Q Project R Project S
Investment required (a)......................... ($14,000) ($48,000) ($74,000)
Present value of cash inflows...............
14,140
54,720
82,140
Net present value (b).............................
$ 140
$ 6,720
$ 8,140
Project profitability index (b) (a).......
0.01
0.14
0.11
Ranked by project profitability index...
3
1
2
AACSB: Analytic
Level: Easy

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 4

148. (Ignore income taxes in this problem.) Hady Company is considering purchasing a machine that
would cost $688,800 and have a useful life of 7 years. The machine would reduce cash operating
costs by $118,759 per year. The machine would have no salvage value.
Required:
a. Compute the payback period for the machine.
b. Compute the simple rate of return for the machine.
Ans:
a. Payback period = Investment required Net annual cash flow
= $688,800 $118,759 = 5.80 years
b. The simple rate of return is computed as follows:
Cost of machine, net of salvage value (a)........
Useful life (b)...................................................
Annual depreciation (a) (b)...........................

$688,800
7 years
$98,400

Annual cost savings.........................................


Less annual depreciation..................................
Annual incremental net operating income.......

$118,759
98,400
$ 20,359

Simple rate of return = Annual incremental net operating income Initial investment = $20,359
$688,800 = 2.96%
AACSB: Analytic
14-14

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 5,6

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Level: Easy
149. (Ignore income taxes in this problem.) Ramson Company is considering purchasing a
machine that would cost $756,000 and have a useful life of 8 years. The machine would reduce cash
operating costs by $132,632 per year. The machine would have a salvage value of $151,200 at the
end of the project.
Required:
a. Compute the payback period for the machine.
b. Compute the simple rate of return for the machine.
Ans:
a. Payback period = Investment required Net annual cash flow
= $756,000 $132,632 = 5.70 years
In this case the salvage value plays no part in the payback period since all of the investment is
recovered before the end of the project.
b. The simple rate of return is computed as follows:
Cost of machine, net of salvage value (a)...........
Useful life (b)......................................................
Annual depreciation (a) (b)..............................

$604,800
8 years
$75,600

Annual cost savings............................................


Less annual depreciation.....................................
Annual incremental net operating income..........

$132,632
75,600
$ 57,032

Simple rate of return = Annual incremental net operating income Initial investment = $57,032
$756,000 = 7.54%
AACSB: Analytic
Level: Medium

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 5,6

150. (Ignore income taxes in this problem.) Ostermeyer Corporation is considering a project that would
require an initial investment of $247,000 and would last for 7 years. The incremental annual
revenues and expenses for each of the 7 years would be as follows:
Sales...................................
Variable expenses...............
Contribution margin...........
Fixed expenses:
Salaries............................
Rents...............................
Depreciation....................
Total fixed expenses...........

$198,000
46,000
152,000
22,000
32,000
33,000
87,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

14-15

Net operating income.........

$ 65,000

At the end of the project, the scrap value of the project's assets would be $16,000.
Required:
Determine the payback period of the project. Show your work!
Ans:
Net operating income.................................
Add noncash deduction for depreciation. . .
Net annual cash inflow...............................

$65,000
33,000
$98,000

Payback period = Investment required Net annual cash inflow


= $247,000 $98,000 = 2.52 years
AACSB: Analytic
Level: Easy

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 5

151. (Ignore income taxes in this problem.) The management of Truelove Corporation is considering a
project that would require an initial investment of $321,000 and would last for 7 years. The annual
net operating income from the project would be $28,000, including depreciation of $42,000. At the
end of the project, the scrap value of the project's assets would be $27,000.
Required:
Determine the payback period of the project. Show your work!
Ans:
Net operating income.................................
Add noncash deduction for depreciation. . .
Net annual cash inflow...............................

$28,000
42,000
$70,000

Payback period = Investment required Net annual cash inflow


= $321,000 $70,000 = 4.59 years
AACSB: Analytic
Level: Easy

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 5

152. (Ignore income taxes in this problem.) Ducey Corporation is contemplating purchasing equipment
that would increase sales revenues by $79,000 per year and cash operating expenses by $27,000 per
year. The equipment would cost $150,000 and have a 6 year life with no salvage value. The annual
depreciation would be $25,000.
Required:
14-16

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your
work!
Ans:
Simple rate of return = Annual incremental net operating income Initial investment
= [Incremental revenues (Cash operating expenses + Depreciation)] Initial investment
=79,000 ($27,000 + $25,000) $150,000
= 27,000 $150,000 = 18.0%
AACSB: Analytic
Level: Easy

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 6

153. (Ignore income taxes in this problem.) The management of Nixon Corporation is investigating
purchasing equipment that would cost $518,000 and have a 7 year life with no salvage value. The
equipment would allow an expansion of capacity that would increase sales revenues by $364,000
per year and cash operating expenses by $211,000 per year.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your
work!
Ans:
Simple rate of return = Annual incremental net operating income Initial investment
= [Incremental revenues (Cash operating expenses + Depreciation)] Initial investment
= 364,000 ($211,000 + $74,000) $518,000
= 79,000 $518,000 = 15.3%
AACSB: Analytic
Level: Easy

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 6

154. (Ignore income taxes in this problem.) Russnak Corporation is investigating automating a process
by purchasing a new machine for $198,000 that would have a 9 year useful life and no salvage
value. By automating the process, the company would save $68,000 per year in cash operating
costs. The company's current equipment would be sold for scrap now, yielding $18,000. The annual
depreciation on the new machine would be $22,000.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your
work!
Ans:
Simple rate of return = Annual incremental net operating income Initial investment
= (Cost savings - Depreciation) Initial investment
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

14-17

= ($68,000 $22,000) ($198,000 $18,000)


= $46,000 $180,000 = 25.6%
155. (Ignore income taxes in this problem.) The management of Schenk Corporation is
investigating automating a process by replacing old equipment by a new machine. The old
equipment would be sold for scrap now for $13,000. The new machine would cost $648,000, would
have a 9 year useful life, and would have no salvage value. By automating the process, the company
would save $186,000 per year in cash operating costs.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your
work!
Ans:
Depreciation on the new machine = $648,000 9 = $72,000
Simple rate of return = Annual incremental net operating income Initial investment
= (Cost savings Depreciation) Initial investment
= ($186,000 $72,000) ($648,000 - $13,000)
= $114,000 $635,000 = 18.0%
AACSB: Analytic
Level: Easy

AICPA BB: Critical Thinking

AICPA FN: Reporting

LO: 6

156. A company is considering purchasing an asset for $70,000 that would have a useful life of 5 years
and would have a salvage value of $12,000. For tax purposes, the entire original cost of the asset
would be depreciated over 5 years using the straight-line method and the salvage value would be
ignored. The asset would generate annual net cash inflows of $22,000 throughout its useful life. The
project would require additional working capital of $8,000, which would be released at the end of
the project. The company's tax rate is 40% and its discount rate is 9%.
Required:
What is the net present value of the asset?
Ans:

Cost of asset........................
Working capital needed......
Net annual cash inflows......
Depreciation tax shield.......
Salvage value......................
Working capital released.....
Net present value................

Years Amount
Now ($70,000)
Now
($8,000)
1-5
$22,000
1-5
$14,000
5
$12,000
5
$8,000
After-Tax

14-18

9%

Tax
Effect
0.60
0.40
0.60

Present

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Cost of asset........................
Working capital needed......
Net annual cash inflows......
Depreciation tax shield.......
Salvage value......................
Working capital released.....
Net present value................

Cash
Flows
($70,000)
($8,000)
$13,200
$5,600
$7,200
$8,000

Factor
1.000
1.000
3.890
3.890
0.650
0.650

AACSB: Analytic AICPA BB: Critical Thinking


LO: 8 Level: Medium

Value
($70,000)
(8,000)
51,348
21,784
4,680
5,200
$ 5,012
AICPA FN: Reporting

Appendix: 14C

157. Management is considering purchasing an asset for $40,000 that would have a useful life of 8 years
and no salvage value. For tax purposes, the entire original cost of the asset would be depreciated
over 8 years using the straight-line method. The asset would generate annual net cash inflows of
$20,000 throughout its useful life. The project would require additional working capital of $5,000,
which would be released at 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:

Cost of asset........................
Working capital needed.......
Net annual cash inflows......
Depreciation tax shield.......
Working capital released.....
Net present value.................

Cost of asset........................
Working capital needed.......
Net annual cash inflows......
Depreciation tax shield.......
Working capital released.....
Net present value.................

Tax
Years Amount Effect
Now ($40,000)
Now
($5,000)
1-8
$20,000
0.60
1-8
$5,000
0.40
8
$5,000
After-Tax
Cash
Present
Flows
12%Factor
Value
($40,000)
1.000
($40,000)
($5,000)
1.000
(5,000)
$12,000
4.968
59,616
$2,000
4.968
9,936
$5,000
0.404
2,020
$26,572

AACSB: Analytic AICPA BB: Critical Thinking


LO: 8 Level: Medium
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

AICPA FN: Reporting

Appendix: 14C

14-19

158. Belling Inc. has provided the following data concerning a proposed investment project:
Initial investment...............
Annual cash receipts..........
Life of the project...............
Annual cash expenses........
Salvage value.....................

$168,000
$126,000
9 years
$50,000
$8,000

The company's tax rate is 30%. For tax purposes, the entire initial investment without any reduction
for salvage value will be depreciated over 7 years. The company uses a discount rate of 14%.
Required:
Compute the net present value of the project.
Ans:
Annual cash receipts........................................ $126,000
Annual cash expenses......................................
50,000
Annual net cash receipts.................................. $ 76,000
Initial investment (a)........................................ $168,000
Tax life (b)........................................................
7 years
Annual depreciation deduction (a) (b).......... $24,000

Initial investment...........................
Annual net cash receipts................
Salvage value.................................
Annual depreciation deductions.....

Initial investment...........................
Annual net cash receipts................
Salvage value.................................
Annual depreciation deductions.....
Net present value............................

Year(s)
Amount
Now ($168,000)
1-9
$76,000
9
$8,000
1-7
$24,000
After-Tax
Cash Flows
($168,000)
$53,200
$5,600
$7,200

AACSB: Analytic AICPA BB: Critical Thinking


LO: 8 Level: Medium

14-20

14%
Factor
1.000
4.946
0.308
4.288

Tax
Effect
0.70
0.70
0.30

After-Tax
Cash Flows
($168,000)
$53,200
$5,600
$7,200

PV
($168,000)
263,127
1,725
30,874
$127,726

AICPA FN: Reporting

Appendix: 14C

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

159. Camel Inc. is considering a project that would require an initial investment of $210,000 and
would have a useful life of 6 years. The annual cash receipts would be $126,000 and the annual
cash expenses would be $57,000. The salvage value of the assets used in the project would be
$32,000. The company's tax rate is 30%. For tax purposes, the entire initial investment without any
reduction for salvage value will be depreciated over 5 years. The company uses a discount rate of
10%.
Required:
Compute the net present value of the project.
Ans:
Annual cash receipts........................................ $126,000
Annual cash expenses......................................
57,000
Annual net cash receipts.................................. $ 69,000
Initial investment (a)........................................ $210,000
Tax life (b)........................................................
5 years
Annual depreciation deduction (a) (b).......... $42,000

Initial investment...........................
Annual net cash receipts................
Salvage value.................................
Annual depreciation deductions.....

Initial investment...........................
Annual net cash receipts................
Salvage value.................................
Annual depreciation deductions.....
Net present value............................

Year(s)
Amount
Now ($210,000)
1-6
$69,000
6
$32,000
1-5
$42,000
After-Tax
Cash Flows
($210,000)
$48,300
$22,400
$12,600

AACSB: Analytic AICPA BB: Critical Thinking


LO: 8 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

10%
Factor
1.000
4.355
0.564
3.791

Tax
Effect
0.70
0.70
0.30

After-Tax
Cash Flows
($210,000)
$48,300
$22,400
$12,600

PV
($210,000)
210,347
12,634
47,767
$ 60,747

AICPA FN: Reporting

Appendix: 14C

14-21