Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
16th Edition
ISBN: 9780134475585
Author: Srikant M. Datar, Madhav V. Rajan
Publisher: PEARSON
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Chapter 21, Problem 21.31E
Project choice, taxes. Klein Dermatology is contemplating purchasing new laser therapy equipment. This new equipment would cost $300,000 to purchase and $20,000 for installation. Klein estimates that this new equipment would yield incremental margins of $98,000 annually due to new client services but would require incremental cash maintenance costs of $10,000 annually. Klein expects the life of this equipment to be 5 years and estimates a terminal disposal value of $20,000.
Klein has a 25% income tax rate and
- 1. What is the expected increase in annual net income from investing in the improvements?
Required
- 2. Calculate the accrual accounting rate of return based on average investment.
- 3. Is the project worth investing in from an
NPV standpoint? - 4. Suppose the tax authorities are willing to let Klein depreciate the project down to zero over its useful life. If Klein plans to liquidate the project in 5 years, should it take this option? Quantify the impact of this choice on the NPV of the project.
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Klein Dermatology is contemplating purchasing new laser therapy equipment.This new equipment would cost $300,000 to purchase and $20,000 for installation. Klein estimatesthat this new equipment would yield incremental margins of $98,000 annually due to new client servicesbut would require incremental cash maintenance costs of $10,000 annually. Klein expects the life of thisequipment to be 5 years and estimates a terminal disposal value of $20,000.Klein has a 25% income tax rate and depreciates assets on a straight-line basis (to terminal value) fortax purposes. The required rate of return on investments is 10%.
Q. What is the expected increase in annual net income from investing in the improvements?
Klein Dermatology is contemplating purchasing new laser therapy equipment.This new equipment would cost $300,000 to purchase and $20,000 for installation. Klein estimatesthat this new equipment would yield incremental margins of $98,000 annually due to new client servicesbut would require incremental cash maintenance costs of $10,000 annually. Klein expects the life of thisequipment to be 5 years and estimates a terminal disposal value of $20,000.Klein has a 25% income tax rate and depreciates assets on a straight-line basis (to terminal value) fortax purposes. The required rate of return on investments is 10%.
Q. Calculate the accrual accounting rate of return based on average investment.
Klein Dermatology is contemplating purchasing new laser therapy equipment. This new equipment would cost $300,000 to purchase and $20,000 for installation. Klein estimates that this new equipment would yield incremental margins of $98,000 annually due to new client services but would require incremental cash maintenance costs of $10,000 annually. Klein expects the life of this equipment to be 5 years and estimates a terminal disposal value of $20,000. Klein has a 25% income tax rate and depreciates assets on a straight-line basis (to terminal value) for tax purposes. The required rate of return on investments is 10%.
Q.Suppose the tax authorities are willing to let Klein depreciate the project down to zero over its useful life. If Klein plans to liquidate the project in 5 years, should it take this option? Quantify the impact of this choice on the NPV of the project.
Chapter 21 Solutions
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
Ch. 21 - Capital budgeting has the same focus as accrual...Ch. 21 - List and briefly describe each of the five stages...Ch. 21 - Prob. 21.3QCh. 21 - Only quantitative outcomes are relevant in capital...Ch. 21 - How can sensitivity analysis be incorporated in...Ch. 21 - Prob. 21.6QCh. 21 - Describe the accrual accounting rate-of-return...Ch. 21 - Prob. 21.8QCh. 21 - Lets be more practical. DCF is not the gospel....Ch. 21 - All overhead costs are relevant in NPV analysis....
Ch. 21 - Prob. 21.11QCh. 21 - Distinguish different categories of cash flows to...Ch. 21 - Prob. 21.13QCh. 21 - How can capital budgeting tools assist in...Ch. 21 - Distinguish the nominal rate of return from the...Ch. 21 - A company should accept for investment all...Ch. 21 - Prob. 21.17MCQCh. 21 - Which of the following statements is true if the...Ch. 21 - Prob. 21.19MCQCh. 21 - Nicks Enterprises has purchased a new machine tool...Ch. 21 - Prob. 21.21ECh. 21 - Capital budgeting methods, no income taxes. Yummy...Ch. 21 - Capital budgeting methods, no income taxes. City...Ch. 21 - Prob. 21.24ECh. 21 - Capital budgeting with uneven cash flows, no...Ch. 21 - Comparison of projects, no income taxes. (CMA,...Ch. 21 - Payback and NPV methods, no income taxes. (CMA,...Ch. 21 - DCF, accrual accounting rate of return, working...Ch. 21 - Prob. 21.29ECh. 21 - Prob. 21.30ECh. 21 - Project choice, taxes. Klein Dermatology is...Ch. 21 - Prob. 21.32ECh. 21 - Selling a plant, income taxes. (CMA, adapted) The...Ch. 21 - Prob. 21.36PCh. 21 - NPV and AARR, goal-congruence issues. Liam...Ch. 21 - Payback methods, even and uneven cash flows. Sage...Ch. 21 - Replacement of a machine, income taxes,...Ch. 21 - Recognizing cash flows for capital investment...Ch. 21 - NPV, inflation and taxes. Fancy Foods is...Ch. 21 - NPV of information system, income taxes. Saina...
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