Question

Cole Electronics is considering investing in manufacturing equipment expected to cost $200,000. The equipment has an estimated useful life of four years and a salvage value of $20,000. It is expected to produce incremental cash revenues of $100,000 per year. Cole has an effective income tax rate of 30 percent and a desired rate of return of 10 percent.

Required
Round your financial figures to the nearest dollar and all other figures to two decimal points.
a. Determine the net present value and the present value index of the investment, assuming that Cole uses straight-line depreciation for financial and income tax reporting.
b. Determine the net present value and the present value index of the investment, assuming that Cole uses double-declining-balance depreciation for financial and income tax reporting.
c. Why do the net present values computed in Requirements a and b differ?
d. Determine the payback period and unadjusted rate of return (use average investment), assuming that Cole uses straight-line depreciation.
e. Determine the payback period and unadjusted rate of return (use average investment), assuming that Cole uses double-declining-balance depreciation.
f. Why are there no differences in the payback periods or unadjusted rates of return computed in Requirements d and e?



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  • CreatedFebruary 07, 2014
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