The Apex Company is evaluating a capital budgeting proposal for the current year. Deal with operating cash flow, not operating income. The relevant data are as follows:
Present Value of an Annuity
Year of $1 in Arrears at 15%
1........ $0.870
2........ 1.626
3........ 2.284
4........ 2.856
5........ 3.353
6........ 3.785
The initial equipment investment would be $36,000. Apex would amortize the equipment for accounting purposes on a straight-line basis over six years with a zero terminal disposal price. The before-tax annual cash inflow arising from this investment is $12,000. The income tax rate is 40%, and income tax is paid the same year as incurred. The capital investment qualifies for a capital cost allowance rate of 20%, declining balance. The after-tax required rate of return is 15%. Choose the best answer for each question and show your computations.
REQUIRED
1. What is the after-tax accrual accounting rate of return on Apex's initial equipment investment?
(a) 10%,
(b) 162/3%,
(c) 262/3%,
(d) 331/3%.
2. What is the after-tax payback period (in years) for Apex's capital budgeting proposal?
(a) 5,
(b) 2.6,
(c) 3,
(d) 2.
3. What is the net present value of Apex's capital budgeting proposal?
(a) $(7,290),
(b) $(1,056),
(c) $7,850,
(d) $11,760.
4. How much would Apex have had to invest five years ago at 15% compounded annually to have $36,000 now?
(a) $12,960,
(b) $17,892,
(c) $20,592,
(d) Cannot be determined from the information given.