Investment: $300,000 Annual sales revenues = $180,000 Annual cash costs = $80,000 4-year useful life, no salvage value Jonas Partners faces a 30% tax rate on income and is aware that the tax authorities will only permit straight- line depreciation for tax purposes. The firm has an after-tax required rate of return of 8%. 1. Based on net present value considerations, is this a project Jonas Partners would want to take? 2. Jonas Partners use straight-line depreciation for internal accounting and measure investment as the net book value of assets at the start of the year. Calculate the residual income in each year if the project were adopted. 3. Demonstrate that the conservation property of residual income, as described on page 900, holds in this example. 4. If Ryan Alcoa is evaluated on the residual income of the projects he undertakes, would he take this project? Explain. Required

Investment: $300,000 Annual sales revenues = $180,000 Annual cash costs = $80,000 4-year useful life, no salvage value Jonas Partners faces a 30% tax rate on income and is aware that the tax authorities will only permit straight- line depreciation for tax purposes. The firm has an after-tax required rate of return of 8%. 1. Based on net present value considerations, is this a project Jonas Partners would want to take? 2. Jonas Partners use straight-line depreciation for internal accounting and measure investment as the net book value of assets at the start of the year. Calculate the residual income in each year if the project were adopted. 3. Demonstrate that the conservation property of residual income, as described on page 900, holds in this example. 4. If Ryan Alcoa is evaluated on the residual income of the projects he undertakes, would he take this project? Explain. Required

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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