Solomon Electronics is considering investing in manufacturing equipment expected to cost $340,000. The equipment has an estimated useful life of four years and a salvage value of $21,000. It is expected to produce incremental cash revenues of $170,000 per year. Solomon has an effective income tax rate of 40 percent and a desired rate of return of 12 percent. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Determine the net present value and the present value index of the investment, assuming that Solomon uses straight-line depreciation for financial and income tax reporting. b. Determine the net present value and the present value index of the investment, assuming that Solomon uses double-declining- balance depreciation for financial and income tax reporting. d. Determine the payback period and unadjusted rate of return (use average investment), assuming that Solomon uses straight-line depreciation.

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
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**Solomon Electronics Investment Analysis**

Solomon Electronics is evaluating a potential investment in manufacturing equipment, with an initial cost of $340,000. The equipment is expected to have a useful life of four years and a salvage value of $21,000. It is projected to generate additional cash revenues of $170,000 per year. The company has an effective income tax rate of 40 percent, aiming for a desired rate of return of 12 percent.

*Note:* Relevant financial factors such as the Present Value of $1 (PV of $1) and the Present Value of Annuity (PVA of $1) should be used to calculate the necessary metrics.

### Requirements:

**a.** Calculate both the net present value (NPV) and the present value index of the investment, assuming Solomon uses straight-line depreciation for financial and income tax reporting.

**b.** Calculate the NPV and present value index of the investment, assuming Solomon utilizes double-declining-balance depreciation for financial and income tax reporting.

**d.** Determine the payback period and the unadjusted rate of return (using average investment), assuming straight-line depreciation.

**e.** Determine the payback period and the unadjusted rate of return (using average investment), assuming double-declining-balance depreciation. *Note:* Use average annual cash flow for computing the payback period and average annual income when determining the unadjusted rate of return.

---

### Interactive Section:

Complete this question by entering your answers in the interactive tabs below.

**Tab 1: Req A and B**
- Enter calculated values for:
  - Net Present Value
  - Present Value Index

**Tab 2: Req D and E**
- Analyze results based on varying depreciation methods.

---

**Instructions for Calculation:**

*Note:* Round your intermediate calculations and answers for "Net Present Value" to the nearest whole dollar amount.

1. **Net Present Value and Present Value Index:**
   - Utilize straight-line and double-declining-balance depreciation calculations to ascertain financial ramifications.

2. **Payback Period & Unadjusted Rate of Return:**
   - Use average investment methodologies with the chosen depreciation strategies for thorough financial analysis.

This educational content guides users through basic investment analysis techniques, highlighting the impact of depreciation methods on financial metrics.
Transcribed Image Text:**Solomon Electronics Investment Analysis** Solomon Electronics is evaluating a potential investment in manufacturing equipment, with an initial cost of $340,000. The equipment is expected to have a useful life of four years and a salvage value of $21,000. It is projected to generate additional cash revenues of $170,000 per year. The company has an effective income tax rate of 40 percent, aiming for a desired rate of return of 12 percent. *Note:* Relevant financial factors such as the Present Value of $1 (PV of $1) and the Present Value of Annuity (PVA of $1) should be used to calculate the necessary metrics. ### Requirements: **a.** Calculate both the net present value (NPV) and the present value index of the investment, assuming Solomon uses straight-line depreciation for financial and income tax reporting. **b.** Calculate the NPV and present value index of the investment, assuming Solomon utilizes double-declining-balance depreciation for financial and income tax reporting. **d.** Determine the payback period and the unadjusted rate of return (using average investment), assuming straight-line depreciation. **e.** Determine the payback period and the unadjusted rate of return (using average investment), assuming double-declining-balance depreciation. *Note:* Use average annual cash flow for computing the payback period and average annual income when determining the unadjusted rate of return. --- ### Interactive Section: Complete this question by entering your answers in the interactive tabs below. **Tab 1: Req A and B** - Enter calculated values for: - Net Present Value - Present Value Index **Tab 2: Req D and E** - Analyze results based on varying depreciation methods. --- **Instructions for Calculation:** *Note:* Round your intermediate calculations and answers for "Net Present Value" to the nearest whole dollar amount. 1. **Net Present Value and Present Value Index:** - Utilize straight-line and double-declining-balance depreciation calculations to ascertain financial ramifications. 2. **Payback Period & Unadjusted Rate of Return:** - Use average investment methodologies with the chosen depreciation strategies for thorough financial analysis. This educational content guides users through basic investment analysis techniques, highlighting the impact of depreciation methods on financial metrics.
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