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%.
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Chapter 12 Solutions
Cost Management: A Strategic Emphasis
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