Calculate for project W and X: (a) The annual Net Profit after Tax (b) The annual...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Calculate for project W and X: (a) The annual Net Profit after Tax (b) The annual Cash Flow after Tax 2. Calculate for project Y and Z: (a) Payback Period (b) Accounting rate of return (ARR) based on original investment only (c) Net present value (NPV) of the discounted cash flows (d) Internal rate of return (IRR) (e) Since they are mutually exclusive projects, which alternative would be selected for each evaluation method? (f) The board of directors have specified that any capital project must achieve a payback period of no longer than 3 years and an accounting rate of return no less than 16%. Based on each board criterion, would you accept or reject either project? Consider each criterion separately in your answer. (g) Using both the NPV and the IRR results, determined in part 1, would you accept or reject either of the projects? Give your reasons in your answer. (h) When making capital budgeting decisions, businesses may also need to consider non- financial and ethical information before making a decision. List one of these non-financial or ethical consideration. Initial capital investment Annual net cash inflow (before tax) Annual net cash inflow (after tax) Annual net profit (after tax) Depreciation method and rate Effective life of the asset Residual value after 5 years (for depreciation) Company tax rate Weighted average cost of capital Board's internal rate of return required Residual / Salvage Value Project W $600,000 $260,000 ? ? 20% Straight line 5 years 0 Project X $800,000 $360,000 30% 16% 25% Nil ? ? 20% Straight line 5 years 0 Project Y $350,000 $120,000 $155,000 $50,000 $75,000 5 years Project Z $400,000 16% 23% Nil 5 years A company purchased a locomotive four years ago. Information relating to the existing locomotive: It was purchased 4 years ago for $4,050,000 It had an expected life of 9 years There was no expected residual for depreciation calculations The expected disposal value at the end of 9 years was estimated at $1,000,000 The current disposal value is estimated at $2,500,000 They have received a proposal for a new locomotive to replace the current one now. The proposal consists of: . $5,000,000 for the new locomotive (including all delivery costs) The new locomotive is considered to be more fuel efficient and is expected to save $600,000 per year in fuel and maintenance costs The new locomotive has an estimated life of 5 year There is no residual value used for depreciation calculations At the end of 5 years, the estimated disposal value is $1,500,000 Other information relevant to the decision: Depreciation method is straight line Company tax rate is 30% The Weighted Average Cost of Capital (WACC) is 10% Tax effects occur in the same year as the income/expense Required: (i) Calculate the NPV of the cash flows for the existing locomotive (ii) Calculate the NPV of the cash flows of the new locomotive proposal (iii) Recommend which option should be adopted based on the results of the NPV calculations. Calculate for project W and X: (a) The annual Net Profit after Tax (b) The annual Cash Flow after Tax 2. Calculate for project Y and Z: (a) Payback Period (b) Accounting rate of return (ARR) based on original investment only (c) Net present value (NPV) of the discounted cash flows (d) Internal rate of return (IRR) (e) Since they are mutually exclusive projects, which alternative would be selected for each evaluation method? (f) The board of directors have specified that any capital project must achieve a payback period of no longer than 3 years and an accounting rate of return no less than 16%. Based on each board criterion, would you accept or reject either project? Consider each criterion separately in your answer. (g) Using both the NPV and the IRR results, determined in part 1, would you accept or reject either of the projects? Give your reasons in your answer. (h) When making capital budgeting decisions, businesses may also need to consider non- financial and ethical information before making a decision. List one of these non-financial or ethical consideration. Initial capital investment Annual net cash inflow (before tax) Annual net cash inflow (after tax) Annual net profit (after tax) Depreciation method and rate Effective life of the asset Residual value after 5 years (for depreciation) Company tax rate Weighted average cost of capital Board's internal rate of return required Residual / Salvage Value Project W $600,000 $260,000 ? ? 20% Straight line 5 years 0 Project X $800,000 $360,000 30% 16% 25% Nil ? ? 20% Straight line 5 years 0 Project Y $350,000 $120,000 $155,000 $50,000 $75,000 5 years Project Z $400,000 16% 23% Nil 5 years A company purchased a locomotive four years ago. Information relating to the existing locomotive: It was purchased 4 years ago for $4,050,000 It had an expected life of 9 years There was no expected residual for depreciation calculations The expected disposal value at the end of 9 years was estimated at $1,000,000 The current disposal value is estimated at $2,500,000 They have received a proposal for a new locomotive to replace the current one now. The proposal consists of: . $5,000,000 for the new locomotive (including all delivery costs) The new locomotive is considered to be more fuel efficient and is expected to save $600,000 per year in fuel and maintenance costs The new locomotive has an estimated life of 5 year There is no residual value used for depreciation calculations At the end of 5 years, the estimated disposal value is $1,500,000 Other information relevant to the decision: Depreciation method is straight line Company tax rate is 30% The Weighted Average Cost of Capital (WACC) is 10% Tax effects occur in the same year as the income/expense Required: (i) Calculate the NPV of the cash flows for the existing locomotive (ii) Calculate the NPV of the cash flows of the new locomotive proposal (iii) Recommend which option should be adopted based on the results of the NPV calculations.
Expert Answer:
Answer rating: 100% (QA)
To calculate the NPV of the cash flows for the existing locomotive and the new locomotive proposal we need to determine the annual cash flows for each ... View the full answer
Related Book For
Posted Date:
Students also viewed these accounting questions
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Capital Budgeting West Fraser Timber Co. Ltd West Fraser is a firm based in Vancouver Island, BC. The company has four plants in British Columbia, and primarily manufactures lumber that is used to...
-
Competency 319.1.3 Capital Budgeting Analysis - The graduate correctly applies time value of money techniques and techniques that ignore present value for capital investment decisions. Competency...
-
A car is randomly selected at a traffic safety checkpoint, and the car has 6 cylinders. Determine whether the given values are from a discrete or continuous data set.
-
What makes the APV capital budgeting framework useful for analyzing foreign capital expenditures?
-
An Ipsos poll asked 1,004 adults If purchasing a used car made certain upgrades or features more affordable, what would be your preferred luxury upgrade? The results indicated that 9% of males and...
-
The pump suitable for small discharge at high pressure head is (a) axial flow (b) centrifugal (c) mixed flow (d) reciprocating
-
Four friends plan to form a corporation for purposes of constructing a shopping center. Charlie will be contributing the land for the project and wants more security than shareholder status provides....
-
The Assignment: Your assignment here is to develop an interview. Select a series of questions that you would want to ask Martha to determine if she committed the crime. In addition, not only will you...
-
Computing Outstanding Checks and Deposits in Transit and Preparing a Bank Reconciliation and Journal Entries The August 2011 bank statement for Allison Company and the August 2011 ledger account for...
-
Use the perturbation method to evaluate
-
You are given three charged particles. Particles 1 and 2 carry charge \(+q\) and particle 3 carries charge \(-4 q\). (a) Determine the relative values of the separation distances \(r_{12}\) and...
-
Compare the magnitudes of the gravitational and electric forces exerted by the nucleus of a hydrogen atom-a single proton \(\left(m_{\mathrm{p}}=1.7 \times 10^{-27} \mathrm{~kg} ight)\) - on an...
-
Consider a jet engine operating on the Brayton cycle. The working substance is air, which consists primarily of diatomic molecules. The air is drawn in at atmospheric pressure, \(1.01 \times 10^{5}...
-
Would it help to place the section where each processor prints "Hello World" in Fig. 12.2 in the critical section? If so why and if not, why not?
-
A 2. 00-L sample of an ideal gas initially at 1. 00 atm and \(273 \mathrm{~K}\) undergoes an isobaric process that cools the sample to \(265 \mathrm{~K}\). (a) What is the final pressure in the gas?...
-
For the simple pendulum shown in the figure, write the governing equation in s-domain. Assume small angles and linearize your model. Initial conditions are zero. Explain each step clearly. L, length...
-
1. True or False. Pitfalls to consider in a statistical test include nonrandom samples, small sample size, and lack of causal links. 2. Because 25 percent of the students in my morning statistics...
-
Russell Tax Services prepares tax returns for senior citizens. The standard in terms of (direct labor) time spent on each return is 3.0 hours. The direct labor standard wage rate at the firm is...
-
Dazzle Fabrics manufactures a specialty monogrammed blanket. The following are the cost standards for this blanket: Direct materials (fabric)....................... 2.0 yards per blanket at $7.00 per...
-
Flora Gardening operates a commercial plant nursery where it propagates plants for garden centers throughout the region. Flora Gardening has $5.25 million in assets. Its yearly fixed costs are...
-
Determine whether each of the following statements is true or false: Management accountants often work in cross-functional teams throughout the organization.
-
Determine whether each of the following statements is true or false: The internal audit function reports to the audit committee of the board of directors.
-
Determine whether each of the following statements is true or false: Management accountants are now more often looked upon as internal business advisors rather than bean counters recording historical...
Study smarter with the SolutionInn App