Homework Help is Here – Start Your Trial Now!
Business
Accounting
a. Use exhibits 26-3 and 26-4 to help compute the net present value of the proposal to sell the existing equipment and buy the laser printer, discounted at an annual rate of 15 percent. In you computation, make the following assumptions regarding the timing of cash flows. 1. The purchase price of the laser printer will be paid in cash immediately.  2. The $200,000 sales price of the existing equipment will be received in cash immediately.  3. The income tax benefit from selling the equipment will be realized one year from today.

a. Use exhibits 26-3 and 26-4 to help compute the net present value of the proposal to sell the existing equipment and buy the laser printer, discounted at an annual rate of 15 percent. In you computation, make the following assumptions regarding the timing of cash flows. 1. The purchase price of the laser printer will be paid in cash immediately.  2. The $200,000 sales price of the existing equipment will be received in cash immediately.  3. The income tax benefit from selling the equipment will be realized one year from today.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
See similar textbooks
icon
Related questions
Question
100%

a. Use exhibits 26-3 and 26-4 to help compute the net present value of the proposal to sell the existing equipment and buy the laser printer, discounted at an annual rate of 15 percent. In you computation, make the following assumptions regarding the timing of cash flows.

1. The purchase price of the laser printer will be paid in cash immediately.

 2. The $200,000 sales price of the existing equipment will be received in cash immediately.

 3. The income tax benefit from selling the equipment will be realized one year from today.

rin Critical Thinking Cases The management of Metro Printers is considering a proposal to replace some existing equip- ment with a new highly efficient laser printer. The existing equipment has a current book value of $2,200,000 and a remaining life (if not replaced) of 10 years. The laser printer has a cost of $1,300,000 and an expected useful life of 10 years. The laser printer would increase the company's annual cash flows by reducing operating costs and by increasing the company's ability to generate revenue. Susan Mills, controller of Metro Printers, has prepared the following estimates of the laser printer's effect on annual earnings and cash flow. Estimated increase in annual cash flow (before taxes): Incremental revenue Cost savings (other than depreciation) Reduction in annual depreciation expense: Depreciation on existing equipment Depreciation on laser printer Estimated increase in income before income taxes Increase in annual income taxes (40%) Estimated increase in annual net income Estimated increase in annual net cash flows ($250,000 - $136,000) ... Book value of existing printing equipment Estimated current sales price, net of removal costs Estimated loss on sale, before income taxes Reduction in current year's income taxes as a result of loss (40%). Loss on sale of existing equipment, net of tax savings 1153 $140,000 110,000 $250,000 $220,000 130,000 90,000 $340,000 136,000 $204,000 $114,000 Don Adams, a director of Metro Printers, makes the following observation: "These estimates look fine, but won't we take a huge loss in the current year on the sale of our existing equipment? After the invention of the laser printer, I doubt that our old equipment can be sold for much at all." In response, Mills provides the following information about the expected loss on the sale of the existing equipment. $2,200,000 200,000 $2,000,000 800,000 $1,200,000 Adams replies, "Good grief, our loss would be almost as great as the cost of the laser itself. Add this $1,200,000 loss to the $1,300,000 cost of the laser, and we're into this new equipment for $2,500,000. I'd go along with a cost of $1,300,000, but $2,500,000 is out of the question.
Transcribed Image Text:rin Critical Thinking Cases The management of Metro Printers is considering a proposal to replace some existing equip- ment with a new highly efficient laser printer. The existing equipment has a current book value of $2,200,000 and a remaining life (if not replaced) of 10 years. The laser printer has a cost of $1,300,000 and an expected useful life of 10 years. The laser printer would increase the company's annual cash flows by reducing operating costs and by increasing the company's ability to generate revenue. Susan Mills, controller of Metro Printers, has prepared the following estimates of the laser printer's effect on annual earnings and cash flow. Estimated increase in annual cash flow (before taxes): Incremental revenue Cost savings (other than depreciation) Reduction in annual depreciation expense: Depreciation on existing equipment Depreciation on laser printer Estimated increase in income before income taxes Increase in annual income taxes (40%) Estimated increase in annual net income Estimated increase in annual net cash flows ($250,000 - $136,000) ... Book value of existing printing equipment Estimated current sales price, net of removal costs Estimated loss on sale, before income taxes Reduction in current year's income taxes as a result of loss (40%). Loss on sale of existing equipment, net of tax savings 1153 $140,000 110,000 $250,000 $220,000 130,000 90,000 $340,000 136,000 $204,000 $114,000 Don Adams, a director of Metro Printers, makes the following observation: "These estimates look fine, but won't we take a huge loss in the current year on the sale of our existing equipment? After the invention of the laser printer, I doubt that our old equipment can be sold for much at all." In response, Mills provides the following information about the expected loss on the sale of the existing equipment. $2,200,000 200,000 $2,000,000 800,000 $1,200,000 Adams replies, "Good grief, our loss would be almost as great as the cost of the laser itself. Add this $1,200,000 loss to the $1,300,000 cost of the laser, and we're into this new equipment for $2,500,000. I'd go along with a cost of $1,300,000, but $2,500,000 is out of the question.
ated in Appendix B Who are not familiar with the concept of present value or with value tables should read the appendix before continuing with this chapter. For your convenience, the two present value tables presented in the appendix are repeated in this chapter. Exhibit 26-3 shows the present value of a single lump-sum payment of $1 to be received in n periods (years) in the future. Exhibit 26-4 shows the present value of a $1 annuity-that is, $1 to be received each year for n consecutive years. For illustrative pur- poses, both tables have been kept short. They include only selected discount rates and only Number of Periods (n) 1 2 3 4 5 6 7 8 9 10 20 24 36 Number of Periods (n) 123 4 5 6 7 8 9 10 20 24 36 Present Value of $1 Due in n Periods* Discount Rate 5% 1% 1% 1½% 6% .926 .909 .893 .870 990 .980 985 952 .943 971 .907 .890 .864 .840 .857 .826 .797 .756 971 956 .794 .794 .751 .751 .712 712 .658 .961 942 823 792 .735 .683 .636 .572 .951 .928 .784 .784 747 .747 .681 .621 .567 .497 .942 915 .746 .705 .630 .564 .507 432 .933 901 .901 .711 .665 .583 .583 .513 .452 .376 .467 .404 .327 .923 888 540 .677 627 875 645 592 .914 .905 .820 .500 .424 .361 .284 .862 .614 .558 .463 .386 .322 .247 .742 .377 .312 .215 .149 .104 .061 .700 .310 .247 .158 .102 .066 .035 .699 .585 .173 .123 .063 .032 .017 .007 .788 8% *The present value of $1 is computed by the formula p = 1/(1 + i)", where p is the present value of $1, i is the discount rate, and n is the number of periods until the future cash flow will occur. Amounts in this table have been rounded to three decimal places and are shown for a limited number of periods and discount rates. Most financial calculators are programmed to use this formula and can compute present values when the future amount is entered along with values for i and n. 5% 6% 10% Present Value of $1 to Be Received Periodically for n Periods Discount Rate 8% 12% 15% 10% 20% .833 .694 .579 .482 .402 .335 .279 .233 .194 .162 .026 .013 .001 12% 15% 20% 1½% 0.990 0.985 0.952 1.970 1.956 1.859 0.926 0.909 0.833 0.943 1.833 0.893 1.783 1.736 1.690 0.870 1.626 1.528 2.577 2.577 2.487 2.402 2.283 2.106 2.941 2.912 2.723 2.673 2.673 3.902 3.854 3.546 3.312 3.170 3.037 2.855 2.589 3.465 4.853 4.783 4.329 4.212 3.993 3.791 3.605 3.352 2.991 5.795 5.697 5.076 4.917 4.623 4.355 4.111 3.784 3.326 6.728 6.598 5.786 5.582 5.206 4.868 4.564 4.160 3.605 6.463 6.210 5.747 5.335 4.968 4.487 3.837 6.247 5.759 5.328 4.772 4.031 7.652 7.486 7.486 8.566 8.361 7.108 6.802 9.471 9.222 7.722 7.360 7.360 6.710 6.145 5.650 5.019 4.192 18.046 17.169 12.462 11.470 9.818 8.514 7.469 6.259 4.870 21.243 20.030 13.799 12.550 10.529 8.985 7.784 6.434 4.937 30.108 27.661 16.547 14.621 11.717 9.677 8.192 6.623 4.993 EXHIBIT 26-3 Present Value of $1 F in n Periods EXHIBIT 26-4 Present Value of a $1. Receivable Each Perioc Periods
Transcribed Image Text:ated in Appendix B Who are not familiar with the concept of present value or with value tables should read the appendix before continuing with this chapter. For your convenience, the two present value tables presented in the appendix are repeated in this chapter. Exhibit 26-3 shows the present value of a single lump-sum payment of $1 to be received in n periods (years) in the future. Exhibit 26-4 shows the present value of a $1 annuity-that is, $1 to be received each year for n consecutive years. For illustrative pur- poses, both tables have been kept short. They include only selected discount rates and only Number of Periods (n) 1 2 3 4 5 6 7 8 9 10 20 24 36 Number of Periods (n) 123 4 5 6 7 8 9 10 20 24 36 Present Value of $1 Due in n Periods* Discount Rate 5% 1% 1% 1½% 6% .926 .909 .893 .870 990 .980 985 952 .943 971 .907 .890 .864 .840 .857 .826 .797 .756 971 956 .794 .794 .751 .751 .712 712 .658 .961 942 823 792 .735 .683 .636 .572 .951 .928 .784 .784 747 .747 .681 .621 .567 .497 .942 915 .746 .705 .630 .564 .507 432 .933 901 .901 .711 .665 .583 .583 .513 .452 .376 .467 .404 .327 .923 888 540 .677 627 875 645 592 .914 .905 .820 .500 .424 .361 .284 .862 .614 .558 .463 .386 .322 .247 .742 .377 .312 .215 .149 .104 .061 .700 .310 .247 .158 .102 .066 .035 .699 .585 .173 .123 .063 .032 .017 .007 .788 8% *The present value of $1 is computed by the formula p = 1/(1 + i)", where p is the present value of $1, i is the discount rate, and n is the number of periods until the future cash flow will occur. Amounts in this table have been rounded to three decimal places and are shown for a limited number of periods and discount rates. Most financial calculators are programmed to use this formula and can compute present values when the future amount is entered along with values for i and n. 5% 6% 10% Present Value of $1 to Be Received Periodically for n Periods Discount Rate 8% 12% 15% 10% 20% .833 .694 .579 .482 .402 .335 .279 .233 .194 .162 .026 .013 .001 12% 15% 20% 1½% 0.990 0.985 0.952 1.970 1.956 1.859 0.926 0.909 0.833 0.943 1.833 0.893 1.783 1.736 1.690 0.870 1.626 1.528 2.577 2.577 2.487 2.402 2.283 2.106 2.941 2.912 2.723 2.673 2.673 3.902 3.854 3.546 3.312 3.170 3.037 2.855 2.589 3.465 4.853 4.783 4.329 4.212 3.993 3.791 3.605 3.352 2.991 5.795 5.697 5.076 4.917 4.623 4.355 4.111 3.784 3.326 6.728 6.598 5.786 5.582 5.206 4.868 4.564 4.160 3.605 6.463 6.210 5.747 5.335 4.968 4.487 3.837 6.247 5.759 5.328 4.772 4.031 7.652 7.486 7.486 8.566 8.361 7.108 6.802 9.471 9.222 7.722 7.360 7.360 6.710 6.145 5.650 5.019 4.192 18.046 17.169 12.462 11.470 9.818 8.514 7.469 6.259 4.870 21.243 20.030 13.799 12.550 10.529 8.985 7.784 6.434 4.937 30.108 27.661 16.547 14.621 11.717 9.677 8.192 6.623 4.993 EXHIBIT 26-3 Present Value of $1 F in n Periods EXHIBIT 26-4 Present Value of a $1. Receivable Each Perioc Periods
Expert Solution
steps

Step by step

Solved in 2 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Cash Flows
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS