CFIN (with Online, 1 term (6 months) Printed Access Card) (New, Engaging Titles from 4LTR Press)
CFIN (with Online, 1 term (6 months) Printed Access Card) (New, Engaging Titles from 4LTR Press)
5th Edition
ISBN: 9781305661653
Author: Scott Besley, Eugene Brigham
Publisher: Cengage Learning
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Chapter 10, Problem 11PROB
Summary Introduction

Net present value:

Net present value is the difference between the present values of cash inflows minus present value of cash outflows.

Calculate the cost of retained earnings are as follows:

Net present value=Present value of cash inflowsInitial investment

Decision rule:

NPV>0 Accept the projectNPV<0 Reject the project

RR is determining to purchase an asset which has cost of $432,000 and installation cost of $52,000. Asset is classified under three years MACRS class and can be sold after three years for $220,000. Savings from the machine is $185,000 and working capital requires is $22,000. Life of the project is 3 years, tax rate is 40% and required rate of return is 14%.

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Rader Railway is determining whether to purchase a new rail setter, which has a base price of $432,000 and would cost another $52,000 to install. The setter falls into the MACRS 3-year class, and it would be sold after 3 years for $220,000. Using the setter requires a $22,000 increase in net working capital. Although it would have no effect on revenues, the setter should save the firm $185,000 per year in before-tax operating costs (including depreciation). Rader's marginal tax rate is 40%, and its required rate of return is 14%. What is the expected NPV of this proposed project?
Rader Railway is determining whether to purchase a new rail setter, which has a base price of $394,000 and would cost another $58,000 to install. The setter will be depreciated according to the MACRS 3-year class of assets, and it would be sold after three years for $196,000. Using the setter requires a $26,000 increase in net working capital. Although it would have no effect on revenues, the setter should save the firm $171,000 per year in before-tax operating costs (excluding depreciation). Rader's marginal tax rate is 40 percent, and its required rate of return is 13 percent. Should the setter be purchased? Do not round intermediate calculations. Round your answer to the nearest cent. Use a minus sign to enter a negative value, if any. The setter **(SHOULD/SHOULD NOT)** be purchased because the net present value, that is (Greater than/Less than/Equal to) is zero. $
Rader Railway is determining whether to purchase a new rail setter, which has a base price of $394,000 and would cost another $58,000 to install. The setter will be depreciated according to the MACRS 3-year class of assets, and it would be sold after three years for $196,000. Using the setter requires a $26,000 increase in net working capital. Although it would have no effect on revenues, the setter should save the firm $171,000 per year in before-tax operating costs (excluding depreciation). Rader's marginal tax rate is 40 percent, and its required rate of return is 13 percent. Should the setter be purchased? Do not round intermediate calculations. Round your answer to the nearest cent. Use a minus sign to enter a negative value, if any.   The setter_____________  be purchased because the net present value, that is $__________   , is ______ zero.
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Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License