Horngren's Cost Accounting, Student Value Edition Plus MyLab Accounting with Pearson eText - Access Card Package (16th Edition)
16th Edition
ISBN: 9780134642468
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.
Marker’s Tattoo Studio wants to buy new laser therapy equipment. This new equipment would cost $300,000 to purchase and $20,000 to install. Marker’s estimates that this new equipment would yield incremental margins of $98,000 annually due to new client services. It would require incremental cash maintenance costs of $10,000 annually. Marker’s expects the life of this equipment to be 5 years. They estimate a terminal disposal value of $20,000.
Marker’s 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%.Suppose that the tax authorities are willing to let Marker’s depreciate the new equipment down to zero over its useful life. If Marker’s plans to liquidate the equipment in 5 years, should it take this option? Quantify the impact of this choice on the NPV of the new equipment.
Chapter 21 Solutions
Horngren's Cost Accounting, Student Value Edition Plus MyLab Accounting with Pearson eText - Access Card Package (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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