Required information A potential investment has a cost of $425,000 and a useful life of 5 years. Annual cash sales from the investment are expected to be $207,158 and annual cash operating expenses are expected to be $81,608. The expected salvage value at the end of the investment's life is $60,000. The company uses straight-line depreciation for all assets based on the full cost of the assets. The company has a before-tax discount rate of 18%, an after-tax discount rate of 15%, and a tax rate of 30%. ired:
Required information A potential investment has a cost of $425,000 and a useful life of 5 years. Annual cash sales from the investment are expected to be $207,158 and annual cash operating expenses are expected to be $81,608. The expected salvage value at the end of the investment's life is $60,000. The company uses straight-line depreciation for all assets based on the full cost of the assets. The company has a before-tax discount rate of 18%, an after-tax discount rate of 15%, and a tax rate of 30%. ired:
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
N4.
Account
Transcribed Image Text:!
Required information
A potential investment has a cost of $425,000 and a useful life of 5 years. Annual cash sales from the investment are
expected to be $207,158 and annual cash operating expenses are expected to be $81,608. The expected salvage value at
the end of the investment's life is $60,000. The company uses straight-line depreciation for all assets based on the full
cost of the assets.
The company has a before-tax discount rate of 18%, an after-tax discount rate of 15%, and a tax rate of 30%.
Required:
1. Assume the company wants to consider this investment before-tax. (Round dollar amounts to the nearest whole dollar and IRR to
one decimal place (i.e. .055 = 5.5%). Enter negative amounts with a minus sign.)
Calculate the before-tax annual PMT of the investment
Calculate the before-tax FV of the investment
Calculate the before-tax NPV of the investment
Calculate the after-tax NPV of the investment
$
Calculate the before-tax IRR of the investment
2. Assume the company wants to consider this investment after-tax. (Round dollar amounts to the nearest whole dollar and IRR to one
decimal place (i.e. .055 = 5.5%). Enter negative amounts with a minus sign.)
Calculate the after-tax annual PMT of the investment
Calculate the after-tax FV of the investment
Calculate the after-tax IRR of the investment
%
%
Transcribed Image Text:Information from a company's accounting system regarding a product is as follows:
Sales
Variable expenses.
Fixed manufacturing expenses.
Fixed selling and administrative expenses
The company is considering discontinuing the product and has gathered the following additional information.
All fixed expenses of the company are fully allocated to products in the company's accounting system. If the product is
discontinued, $198,000 of the fixed manufacturing expenses and $171,700 of the fixed selling and administrative expenses are
avoidable.
Required:
Calculate the financial advantage (disadvantage) of dropping the product. Should it be dropped?
Net operating income (loss) would
decline
$824,300
$428,200
$280,000
$239,000
increase
by
if the product were dropped. Therefore, the product
should be
dropped
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