Stuart Electronics is considering investing in manufacturing equipment expected to cost $350,000. The equipment has an estimated useful life of four years and a salvage value of $22,000. It is expected to produce incremental cash revenues of $175,000 per year. Stuart has an effective income tax rate of 30 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 Stuart 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 Stuart 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 Stuart uses straight-line depreciation. e. Determine the payback period and unadjusted rate of return (use average investment); assuming that Stuart uses double-declining- balance depreciation. (Note: Use average annual cash flow when computing the payback period and average annual income when determining the unadjusted rate of return.)

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Stuart Electronics is considering investing in manufacturing equipment expected to cost $350,000. The equipment has an estimated
useful life of four years and a salvage value of $22,000. It is expected to produce incremental cash revenues of $175,000 per year.
Stuart has an effective income tax rate of 30 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 Stuart 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 Stuart 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 Stuart uses straight-line
depreciation.
e. Determine the payback period and unadjusted rate of return (use average investment); assuming that Stuart uses double-declining-
balance depreciation. (Note: Use average annual cash flow when computing the payback period and average annual income when
determining the unadjusted rate of return.)
Transcribed Image Text:Stuart Electronics is considering investing in manufacturing equipment expected to cost $350,000. The equipment has an estimated useful life of four years and a salvage value of $22,000. It is expected to produce incremental cash revenues of $175,000 per year. Stuart has an effective income tax rate of 30 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 Stuart 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 Stuart 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 Stuart uses straight-line depreciation. e. Determine the payback period and unadjusted rate of return (use average investment); assuming that Stuart uses double-declining- balance depreciation. (Note: Use average annual cash flow when computing the payback period and average annual income when determining the unadjusted rate of return.)
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