The William Company has been offered a seven year contract to haul iron ore. Since this contract would represent new business, the company would have to purchase new trucks costing a total of $350,000 if the contract is accepted. Other data relating to the contract: Net annual cash receipts (before taxes) from the contract s105,000 Cost to replace the truck motors in four years 45,000 Salvage value of the trucks at the end of the contract 18,000 With the motors being replaced after four years, the trucks will have a useful life of seven years. To raise money to help purchase the new trucks, the company will sell several old, fully depreciated trucks for a total selling price of $16,000. The company uses MACRS to compute depreciation for tax purposes and requires a 16% after-tax return on all equipment purchases. The tax rate is 30%. The trucks would be in the MACRS five-year property class.

The William Company has been offered a seven year contract to haul iron ore. Since this contract would represent new business, the company would have to purchase new trucks costing a total of $350,000 if the contract is accepted. Other data relating to the contract: Net annual cash receipts (before taxes) from the contract s105,000 Cost to replace the truck motors in four years 45,000 Salvage value of the trucks at the end of the contract 18,000 With the motors being replaced after four years, the trucks will have a useful life of seven years. To raise money to help purchase the new trucks, the company will sell several old, fully depreciated trucks for a total selling price of $16,000. The company uses MACRS to compute depreciation for tax purposes and requires a 16% after-tax return on all equipment purchases. The tax rate is 30%. The trucks would be in the MACRS five-year property class.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

The Titanic Shipbuilding Company has a noncancelable contract to build a small cargo vessel. Construction involves a cash outlay of $270,000 at the end of each of the next two years. At the end of the third year, the company will receive payment of $620,000. The company can speed up construction by working an extra shift. In this case, there will be a cash outlay of $584,000 at the end of the first year followed by a cash payment of $620,000 at the end of the second year. Use the IRR rule to show the (approximate) range of opportunity costs of capital at which the company should work the extra shift. Note: Enter your answers as a percent rounded to 2 decimal places. Enter the smallest percent first. The company should work the extra shift if the cost of capital is between % and %.
Wildhorse Company manufactures a check-in kiosk with an estimated economic life of 10 years and leases it to Sheffield Chicken for a period of 9 years. The normal selling price of the equipment is $172,124, and its unguaranteed residual value at the end of the lease term is estimated to be $26,200. Sheffield will pay annual payments of $20,800 at the beginning of each year. Wildhorse incurred costs of $141,100 in manufacturing the equipment and $2,400 in sales commissions in closing the lease. Wildhorse has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 5%. Sheffield Chicken has an incremental borrowing rate of 5%. The lessor's implicit rate is unknown to the lessee.
Speed, Inc., is a shipping company. On 1/1/20, the company purchases a new commercial sleeper truck for $790,000 cash. The expected residual value of the truck is $60,000 and the expected useful life is 10 years. The company estimates that the truck will be used to drive 1,000,000 miles over its useful life (120,000 miles in 2020; 90,000 miles in 2021 & all subsquent years). For the units-of-activity method, round the depreciaiton-per-unit to two decimal places before using it. You PART A - STRAIGHT LINE DEPRECIATION Income StatementDepreciation Expense Year Ended 12/31/2020fill in the blank 1 Year Ended 12/31/2021 fill in the blank 2 Balance SheetAccumulated Depreciation As of 12/31/2020fill in the blank 3 As of 12/31/2021fill in the blank 4 PART B - UNITS-OF-ACTIVITY DEPRECIATION Income StatementDepreciation Expense Year Ended 12/31/2020fill in the blank 5 Year Ended 12/31/2021 fill in the blank 6 Balance SheetAccumulated Depreciation As of 12/31/2020fill in the…
The LJB Company must replace a freezer and is trying to decide betweenthe following two alternatives:Item Freezer A Freezer BInvestment required ($29,000) ($25,000)Annual electrical bill (3,000) (4,000)Salvage value 6,000 5,000Project life in years 11 11The LJB Company’s cost of capital is 8 percent.Which investment provides LJB with the lowest total cost?
Covidam Company clinches a contract to supply cleaning services to a nursing home for the next 5 years. Under the contract, the Company will be paid $1 million a year. To take up this contract, it would have to invest in new cleaning equipment costing $600,000 which will be depreciated straight line to zero over 5 years. There is no salvage value at the end of 5 years. Labour cost will be $300,000 per year and overheads $250,000per year. The Company will need to invest in net working capital of $350,000. It plans to issue $1 million worth of bonds for 5 years at a coupon rate of 6% and will price the bonds at par. The Company has an existing bank loan of $9 million. The cost of debt from the bank loan is the same as the bonds. The common stock of the Company is selling for $10 per share and it has 2 million shares outstanding. Expected dividend next year is $1 per share and dividends are expected to grow at 2% per annum into the foreseeable future. The tax rate is 20%.(a) Determine the…
On October 1, White Way Stores Inc. is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternatively, the company could use the funds to invest in $176,000 of 7% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment $176,000 Life of store equipment 16 years Estimated residual value of store equipment $16,800 Yearly costs to operate the store, excluding depreciation of store equipment $57,740 Yearly expected revenues—years 1–8 $87,700 Yearly expected revenues—years 9–16 $72,000 Required: A. Prepare a differential analysis as of October 1 presenting the proposed operation of the store for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes…
Mala Prohibita Inc. is evaluating a proposal to acquire a new equipment. The equipment would require an investment of P417,860, including freight and installation cost of P40,000. It expected to have a 10- year life with no scrap value at the end of its life. It has been estimated that the new equipment would increase the company's cash inflows, net of expenses and income taxes by P68,000. The company can issue its 7% P1,000 par value bond to fund the project. The same type of bond is available in the market at P932.04836 per bond with interest payable semi-annually for ten years. The company is subject to 32% income tax. Determine the Cost of Capital (k) Using NPV and IRR method, give your recommendation if the company should push the project or not. Explain your answer.
The ML Company imported a new machine at a peso equivalent of $1,320,000. The company has to pay additional cost of importing the asset such as $40,000 import duties and $60,000 non-refundable purchase taxes. Costs of transporting the asset was $20,000 and cost of preparing the asset for its intended use include $12,000 installation and $8,000 testing and trial run costs. How much is the initial cost of the new machine?
Sushi Corp. purchased and installed electronic payment equipment at its drive-in restaurants in San Marcos, TX, at a cost of $51,300. The equipment has an estimated residual value of $3,300 The equipment is expected to process 267,000 payments over its three- year useful life. Per year, expected payment transactions are 64,080, year 1, 146,850, year 2, and 56,070, year 3. TIP: You cannot depreciation past residual/salvage value in the last year of depreciation. Required: Complete a depreciation schedule for each of the alternative methods. 1. Straight-line. 2. Units-of-production. 3. Double-declining-balance. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Complete a depreciation schedule for Straight-line method. (Do not round intermediate calculations.) Income Statement Year At acquisition 1 2 3 Depreciation Expense $ Cost 51,300 51,300 Balance Sheet wwwwww 51,300 Accumulated Depreciation Required 1 Book Value Required 2 >
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company's discount rate is 18% and it estimated the following costs and revenues for the new product: Cost of equipment needed Working capital needed Overhaul of the equipment in two years. Salvage value of the equipment in four years Annual revenues and costs: Sales revenues $ 220,000 $ 81,000 $ 7,500 $ 10,500 $ 370,000 $ 180,000 $ 82,000 Variable expenses Fixed out-of-pocket operating costs When the project concludes in four years, the working capital will be released for investment elsewhere within the company. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: Calculate the net present value of this investment opportunity. Note: Round your final answer to the nearest whole dollar amount. Net present value
Covidam Company clinches a contract to supply cleaning services to a nursing home for the next 5 years. Under the contract, the Company will be paid $1 million a year. To take up this contract, it would have to invest in new cleaning equipment costing $600,000 which will be depreciated straight line to zero over 5 years. There is no salvage value at the end of 5 years. Labour cost will be $300,000 per year and overheads $250,000 per year. The Company will need to invest in net working capital of $350,000. It plans to issue $1 million worth of bonds for 5 years at a coupon rate of 6% and will price the bonds at par. The Company has an existing bank loan of $9 million. The cost of debt from the bank loan is the same as the bonds. The common stock of the Company is selling for $10 per share and it has 2 million shares outstanding. Expected dividend next year is $1 per share and dividends are expected to grow at 2% per annum into the foreseeable future. The tax rate is 20%. 1. Calculate…
Ovida company clinches a contract to supply cleaning services to a nursing home for the next 5 years. Under the contract, the company will be paid $1 million a year. To take up this contract, it would have to invest in new cleaning equipment costing $600,000 which will be depreciated straight-line to zero over 5 years. there is no salvage value at the end of 5 years. labour costs will be $300,000 per year and overheads $250,000 per year. the company will need to invest in net working capital of $350,000. it plans to issue $1 million worth of bonds for the next 5 years at a coupon rate of 6% and will price bonds at par. the company has an existing bank loan of $9 million. the cost of debt from a bank loan is the same as the bonds. the common stock of the company is selling for $10 per share and it has 2 million shares outstanding. expected dividend next year is $1 per share and dividends are expected to grow at 2% per annum. the tax rate is 20%. (a) compute the cost of equity b)…