1.
Calculate the investment’s net after-tax annual
1.
Explanation of Solution
A capital investment is a project involving large fund expenditure and future benefits expected over a number of years. Capital budgeting is the process of identification, assessment, selection and controlling invested capital. A strategic
The capital structure refers to the means of financing a company; the mix between debt, and capital stock.
Sensitivity analysis is the process of varying a key input variable selectively, for
Example: discount rate, to determine the range within which a capital budget decision is valid.
Calculate
Depreciation per year, SL basis: ($30,600 – $600) ÷ 6 years = $5,000
| Particulars | Amount |
| Taxable income ($8,000 – $5,000) | |
| Multiply: Tax rate | |
| Income tax |
Pre-tax annual
Calculate net after-tax annual cash inflow of company, D & G:
Working notes:
Total cost of machine is $30,600.
Estimated life of machine is 6 years and its estimated salvage value is $600.
Estimated annual cash savings by using new machine is $8,000.
Company’s after tax cost of capital is 8% and its income tax rate is 40%.
2.
Calculate the payback period assuming that the net after-tax annual cash flow of the investment is $5,000.
2.
Explanation of Solution
A capital investment is a project involving large fund expenditure and future benefits expected over a number of years. Capital budgeting is the process of identification, assessment, selection and controlling invested capital. A strategic control system relates to the processes and uses organization to monitor organizational progress in terms of the achievement of its strategic objectives. A capital budget for a given time period consists of a listing of approved and anticipated investment projects cash outflows linked to those projects.
The capital structure refers to the means of financing a company; the mix between debt, and capital stock.
An investment's payback period is the amount of time required for cumulative after-tax cash inflows from an investment to recover initial outlay of the investment.
Calculate the payback period of company, D & G:
Hence, the payback period of company, D & G will be 7 years.
Working notes:
Total cost of machine is $30,600.
Estimated life of machine is 6 years and its estimated salvage value is $600.
Estimated annual cash savings by using new machine is $8,000.
Company’s after tax cost of capital is 8% and its income tax rate is 40%.
3.
Calculate the
3.
Explanation of Solution
A capital investment is a project involving large fund expenditure and future benefits expected over a number of years. Capital budgeting is the process of identification, assessment, selection and controlling invested capital. A strategic control system relates to the processes and uses organization to monitor organizational progress in terms of the achievement of its strategic objectives. A capital budget for a given time period consists of a listing of approved and anticipated investment projects cash outflows linked to those projects.
The capital structure refers to the means of financing a company; the mix between debt, and capital stock.
NPV is the difference between present value (PV) of cash inflows and PV of cash outflows.
The actual value of a future cash flow (PV) is its current equivalent value; also known as time-adjusted value.
Calculate the NPV of the investment of company, D & G:
| Particulars | Amount |
| PV of annual after-tax cash savings ($5,000 × 4.623) | |
| PV of salvage value ($ 600 × 0.63) | |
| Total Present Value of Cash Inflows | |
| Initial Investment Cash Outlay | |
| Net Present Value | ($7,107) |
Working notes:
Total cost of machine is $30,600.
Estimated life of machine is 6 years and its estimated salvage value is $600.
Estimated annual cash savings by using new machine is $8,000.
Company’s after tax cost of capital is 8% and its income tax rate is 40%.
4.
Calculate the minimum net after-tax annual cost savings that make the proposed investment acceptable.
4.
Explanation of Solution
A capital investment is a project involving large fund expenditure and future benefits expected over a number of years. Capital budgeting is the process of identification, assessment, selection and controlling invested capital. A strategic control system relates to the processes and uses organization to monitor organizational progress in terms of the achievement of its strategic objectives. A capital budget for a given time period consists of a listing of approved and anticipated investment projects cash outflows linked to those projects.
The capital structure refers to the means of financing a company; the mix between debt, and capital stock.
NPV is the difference between present value (PV) of cash inflows and PV of cash outflows.
The actual value of a future cash flow (PV) is its current equivalent value; also known as time-adjusted value.
Let X = a minimum yearly cost savings after tax, and let NPV = 0. The Initial Investment Outlay ($30,600) is reduced by an 8 percent discount rate (i.e. $378) on the PV of the asset's salvage value. Thus, we have (by definition): if NPV = $0
Calculate the minimum net after-tax annual cost savings:
Hence, the minimum net after-tax annual cost savings required to justify the investment is $6,537.
Working notes:
Total cost of machine is $30,600.
Estimated life of machine is 6 years and its estimated salvage value is $600.
Estimated annual cash savings by using new machine is $8,000.
Company’s after tax cost of capital is 8% and its income tax rate is 40%.
Want to see more full solutions like this?
Chapter 12 Solutions
Cost Management: A Strategic Emphasis
- Given the following information how much raw material was transferred to work in progress on March 31? Inventory on March 1 is $420,000, raw materials purchased in March are $735,000, and raw materials inventory on March 31 is $185,000. A: $890,000 B: $970,000 C: $780,000 D: $955,000arrow_forwardI am trying to find the accurate solution to this general accounting problem with the correct explanation.arrow_forwardGeneral accountingarrow_forward
- I need assistance with this financial accounting problem using valid financial procedures.arrow_forwardWhich of the following is a characteristic of a perpetual inventory system? a. Inventory records are updated continuously b. Cost of goods sold is calculated at the end of the period c. Inventory is only counted at year-end d. Physical counts are never required MCQarrow_forwardReynolds corporation shipped out an order on March 10th (FOB destination) for a total of $21,450.75.arrow_forward
- I want the correct answer with accounting questionarrow_forwardPlease provide the answer to this general accounting question with proper steps.arrow_forwardAt the beginning of the recent period there were 1,250 units of product in a department, one-half completed. These units were finished and an additional 6,300 units were started and completed during the period. 820 units were still in process at the end of the period, one-third completed. Using the weighted-average valuation method, the equivalent units produced by the department were ___ units.arrow_forward
AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,
Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSON
Intermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill Education
Financial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education