Adequate information: Cost of new computer = $580,000 Useful life of new computer = 5 years Pre-tax salvage value of new computer = $130,000 Saving in operating cost of new computer = $85,000 Cost of old computer = $450,000 Depreciation on the old computer per year = 90,000 Sale value of old computer = $230,000 Pre-tax salvage value of old computer = $60,000 Discount rate, r = 14% or 0.14 Tax rate = 21% or 0.21 To compute: Whether to replace the old computer and invest in the new computer. Introduction: Equivalent annual cost (EAC) refers to the yearly cost of maintaining and operating assets over their life. The equivalent annual cost is useful for the company when taking capital budgeting decisions. It is helpful in the comparison of alternatives that have an unequal useful life.

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Answer 1

Question

Chapter 6, Problem 37QAP

a.

Summary Introduction

Adequate information:

Cost of new computer = $580,000

Useful life of new computer = 5 years

Pre-tax salvage value of new computer = $130,000

Saving in operating cost of new computer = $85,000

Cost of old computer = $450,000

Depreciation on the old computer per year = 90,000

Sale value of old computer = $230,000

Pre-tax salvage value of old computer = $60,000

Discount rate, r = 14% or 0.14

Tax rate = 21% or 0.21

To compute: Whether to replace the old computer and invest in the new computer.

Introduction: Equivalent annual cost (EAC) refers to the yearly cost of maintaining and operating assets over their life. The equivalent annual cost is useful for the company when taking capital budgeting decisions. It is helpful in the comparison of alternatives that have an unequal useful life.

b.

Summary Introduction

Adequate information:

Cost of new computer = $580,000

Useful life of new computer = 5 years

Pre-tax salvage value of new computer = $130,000

Saving in operating cost of new computer = $85,000

Cost of old computer = $450,000

Depreciation on the old computer per year = 90,000

Sale value of old computer = $230,000

Pre-tax salvage value of old computer = $60,000

Discount rate, r = 14% or 0.14

Tax rate = 21% or 0.21

To compute:

The relevant cash flows

Whether to replace the old computer and invest in the new computer.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow. The decision criteria of net present value are that in the case of a single project, if the net present value of the project is zero or positive, the project should be accepted, otherwise rejected. In the case of the mutually exclusive project, the project having the higher net present value should be selected.

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Answer 2

Question

Chapter 6, Problem 37QAP

a.

Summary Introduction

Adequate information:

Cost of new computer = $580,000

Useful life of new computer = 5 years

Pre-tax salvage value of new computer = $130,000

Saving in operating cost of new computer = $85,000

Cost of old computer = $450,000

Depreciation on the old computer per year = 90,000

Sale value of old computer = $230,000

Pre-tax salvage value of old computer = $60,000

Discount rate, r = 14% or 0.14

Tax rate = 21% or 0.21

To compute: Whether to replace the old computer and invest in the new computer.

Introduction: Equivalent annual cost (EAC) refers to the yearly cost of maintaining and operating assets over their life. The equivalent annual cost is useful for the company when taking capital budgeting decisions. It is helpful in the comparison of alternatives that have an unequal useful life.

b.

Summary Introduction

Adequate information:

Cost of new computer = $580,000

Useful life of new computer = 5 years

Pre-tax salvage value of new computer = $130,000

Saving in operating cost of new computer = $85,000

Cost of old computer = $450,000

Depreciation on the old computer per year = 90,000

Sale value of old computer = $230,000

Pre-tax salvage value of old computer = $60,000

Discount rate, r = 14% or 0.14

Tax rate = 21% or 0.21

To compute:

The relevant cash flows

Whether to replace the old computer and invest in the new computer.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow. The decision criteria of net present value are that in the case of a single project, if the net present value of the project is zero or positive, the project should be accepted, otherwise rejected. In the case of the mutually exclusive project, the project having the higher net present value should be selected.

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Answer 3

Question

Chapter 6, Problem 37QAP

a.

Summary Introduction

Adequate information:

Cost of new computer = $580,000

Useful life of new computer = 5 years

Pre-tax salvage value of new computer = $130,000

Saving in operating cost of new computer = $85,000

Cost of old computer = $450,000

Depreciation on the old computer per year = 90,000

Sale value of old computer = $230,000

Pre-tax salvage value of old computer = $60,000

Discount rate, r = 14% or 0.14

Tax rate = 21% or 0.21

To compute: Whether to replace the old computer and invest in the new computer.

Introduction: Equivalent annual cost (EAC) refers to the yearly cost of maintaining and operating assets over their life. The equivalent annual cost is useful for the company when taking capital budgeting decisions. It is helpful in the comparison of alternatives that have an unequal useful life.

b.

Summary Introduction

Adequate information:

Cost of new computer = $580,000

Useful life of new computer = 5 years

Pre-tax salvage value of new computer = $130,000

Saving in operating cost of new computer = $85,000

Cost of old computer = $450,000

Depreciation on the old computer per year = 90,000

Sale value of old computer = $230,000

Pre-tax salvage value of old computer = $60,000

Discount rate, r = 14% or 0.14

Tax rate = 21% or 0.21

To compute:

The relevant cash flows

Whether to replace the old computer and invest in the new computer.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow. The decision criteria of net present value are that in the case of a single project, if the net present value of the project is zero or positive, the project should be accepted, otherwise rejected. In the case of the mutually exclusive project, the project having the higher net present value should be selected.

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Answer 4

Question

Chapter 6, Problem 37QAP

a.

Summary Introduction

Adequate information:

Cost of new computer = $580,000

Useful life of new computer = 5 years

Pre-tax salvage value of new computer = $130,000

Saving in operating cost of new computer = $85,000

Cost of old computer = $450,000

Depreciation on the old computer per year = 90,000

Sale value of old computer = $230,000

Pre-tax salvage value of old computer = $60,000

Discount rate, r = 14% or 0.14

Tax rate = 21% or 0.21

To compute: Whether to replace the old computer and invest in the new computer.

Introduction: Equivalent annual cost (EAC) refers to the yearly cost of maintaining and operating assets over their life. The equivalent annual cost is useful for the company when taking capital budgeting decisions. It is helpful in the comparison of alternatives that have an unequal useful life.

b.

Summary Introduction

Adequate information:

Cost of new computer = $580,000

Useful life of new computer = 5 years

Pre-tax salvage value of new computer = $130,000

Saving in operating cost of new computer = $85,000

Cost of old computer = $450,000

Depreciation on the old computer per year = 90,000

Sale value of old computer = $230,000

Pre-tax salvage value of old computer = $60,000

Discount rate, r = 14% or 0.14

Tax rate = 21% or 0.21

To compute:

The relevant cash flows

Whether to replace the old computer and invest in the new computer.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow. The decision criteria of net present value are that in the case of a single project, if the net present value of the project is zero or positive, the project should be accepted, otherwise rejected. In the case of the mutually exclusive project, the project having the higher net present value should be selected.

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Answer 5

Chapter 6, Problem 37QAP

a.

Summary Introduction

Adequate information:

Cost of new computer = $580,000

Useful life of new computer = 5 years

Pre-tax salvage value of new computer = $130,000

Saving in operating cost of new computer = $85,000

Cost of old computer = $450,000

Depreciation on the old computer per year = 90,000

Sale value of old computer = $230,000

Pre-tax salvage value of old computer = $60,000

Discount rate, r = 14% or 0.14

Tax rate = 21% or 0.21

To compute: Whether to replace the old computer and invest in the new computer.

Introduction: Equivalent annual cost (EAC) refers to the yearly cost of maintaining and operating assets over their life. The equivalent annual cost is useful for the company when taking capital budgeting decisions. It is helpful in the comparison of alternatives that have an unequal useful life.

b.

Summary Introduction

Adequate information:

Cost of new computer = $580,000

Useful life of new computer = 5 years

Pre-tax salvage value of new computer = $130,000

Saving in operating cost of new computer = $85,000

Cost of old computer = $450,000

Depreciation on the old computer per year = 90,000

Sale value of old computer = $230,000

Pre-tax salvage value of old computer = $60,000

Discount rate, r = 14% or 0.14

Tax rate = 21% or 0.21

To compute:

The relevant cash flows

Whether to replace the old computer and invest in the new computer.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow. The decision criteria of net present value are that in the case of a single project, if the net present value of the project is zero or positive, the project should be accepted, otherwise rejected. In the case of the mutually exclusive project, the project having the higher net present value should be selected.

Answer 6

Chapter 6, Problem 37QAP

a.

Summary Introduction

Adequate information:

Cost of new computer = $580,000

Useful life of new computer = 5 years

Pre-tax salvage value of new computer = $130,000

Saving in operating cost of new computer = $85,000

Cost of old computer = $450,000

Depreciation on the old computer per year = 90,000

Sale value of old computer = $230,000

Pre-tax salvage value of old computer = $60,000

Discount rate, r = 14% or 0.14

Tax rate = 21% or 0.21

To compute: Whether to replace the old computer and invest in the new computer.

Introduction: Equivalent annual cost (EAC) refers to the yearly cost of maintaining and operating assets over their life. The equivalent annual cost is useful for the company when taking capital budgeting decisions. It is helpful in the comparison of alternatives that have an unequal useful life.

Answer 7

Chapter 6, Problem 37QAP

a.

Summary Introduction

Adequate information:

Cost of new computer = $580,000

Useful life of new computer = 5 years

Pre-tax salvage value of new computer = $130,000

Saving in operating cost of new computer = $85,000

Cost of old computer = $450,000

Depreciation on the old computer per year = 90,000

Sale value of old computer = $230,000

Pre-tax salvage value of old computer = $60,000

Discount rate, r = 14% or 0.14

Tax rate = 21% or 0.21

To compute: Whether to replace the old computer and invest in the new computer.

Introduction: Equivalent annual cost (EAC) refers to the yearly cost of maintaining and operating assets over their life. The equivalent annual cost is useful for the company when taking capital budgeting decisions. It is helpful in the comparison of alternatives that have an unequal useful life.

Answer 8

b.

Summary Introduction

Adequate information:

Cost of new computer = $580,000

Useful life of new computer = 5 years

Pre-tax salvage value of new computer = $130,000

Saving in operating cost of new computer = $85,000

Cost of old computer = $450,000

Depreciation on the old computer per year = 90,000

Sale value of old computer = $230,000

Pre-tax salvage value of old computer = $60,000

Discount rate, r = 14% or 0.14

Tax rate = 21% or 0.21

To compute:

The relevant cash flows

Whether to replace the old computer and invest in the new computer.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow. The decision criteria of net present value are that in the case of a single project, if the net present value of the project is zero or positive, the project should be accepted, otherwise rejected. In the case of the mutually exclusive project, the project having the higher net present value should be selected.

Answer 9

b.

Summary Introduction

Adequate information:

Cost of new computer = $580,000

Useful life of new computer = 5 years

Pre-tax salvage value of new computer = $130,000

Saving in operating cost of new computer = $85,000

Cost of old computer = $450,000

Depreciation on the old computer per year = 90,000

Sale value of old computer = $230,000

Pre-tax salvage value of old computer = $60,000

Discount rate, r = 14% or 0.14

Tax rate = 21% or 0.21

To compute:

The relevant cash flows

Whether to replace the old computer and invest in the new computer.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow. The decision criteria of net present value are that in the case of a single project, if the net present value of the project is zero or positive, the project should be accepted, otherwise rejected. In the case of the mutually exclusive project, the project having the higher net present value should be selected.

Answer 10

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Answer 11

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Answer 13

Ch. 6 - Opportunity Cost In the context of capital...Ch. 6 - Prob. 2CQ Ch. 6 - Incremental Cash Flows Your company currently...Ch. 6 - Depreciation Given the choice, would a firm prefer...Ch. 6 - Prob. 5CQ Ch. 6 - Prob. 6CQ Ch. 6 - Equivalent Annual Cost When is EAC analysis...Ch. 6 - Prob. 8CQ Ch. 6 - Capital Budgeting Considerations A major college...Ch. 6 - To answer the next three questions, refer to the...

Solution Summary: The author calculates the present value (PV) of the cost of a new computer using the depreciation tax shield approach.

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Chapter 6 Solutions