Chapter 141

Chapter 14 Capital Budgeting Decisions
True/False Questions
1. When cash flows are uneven and vary from year to year, the internal rate of return
method is easier to use than the net present value method.
Ans: False AACSB: Analytic AICA BB: Critical !hin"in#
AICA F$: %eportin# &': 1,( &evel: )ard
(. For capital *ud#etin# decisions, the net present value method is superior to the simple
rate of return method.
Ans: !rue AACSB: %eflective !hin"in# AICA BB: Critical !hin"in#
AICA F$: %eportin# &': 1,+ &evel: ,asy
-. .epreciation is included as a cash flow in capital *ud#etin# decisions to ensure that
the ori#inal cost of the asset is fully recovered.
Ans: False AACSB: %eflective !hin"in# AICA BB: Critical !hin"in#
AICA F$: %eportin# &': 1 &evel: /edium
0. ,ven when done properly, the total1cost and incremental1cost approaches to choosin#
*etween alternatives will sometimes yield different answers.
2. An increase in the e3pected salva#e value at the end of a capital *ud#etin# pro4ect will
have no effect on the internal rate of return for that pro4ect.
AICA F$: %eportin# &': ( &evel: /edium
+. !he intan#i*le *enefits of automation cannot *e estimated with any accuracy and
therefore should *e i#nored in capital *ud#etin# decisions.
AICA F$: %eportin# &': - &evel: /edium
5. When ma"in# preference decisions a*out competin# investment proposals, the pro4ect
profita*ility inde3 is superior to the internal rate of return.
Ans: !rue AACSB: Analytic AICA BB: Critical !hin"in#
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-7
6. !he pro4ect profita*ility inde3 is computed *y dividin# the net present value of the
pro4ect *y the investment re7uired *y the pro4ect.
AICA F$: %eportin# &': 0 &evel: ,asy
8. In calculatin# the 9investment re7uired: for the pro4ect profita*ility inde3, the amount
invested should *e reduced *y any salva#e recovered from the sale of old e7uipment.
1;. !he pay*ac" method is most appropriate for pro4ects whose cash flows e3tend far into
the future.
11. When usin# the pay*ac" method, any cash flows for a pro4ect that occur after the
pay*ac" period are not considered in computin# the pay*ac" period for that pro4ect.
1(. !he present value of a #iven future cash flow will increase as the discount rate
decreases.
1-. If a company is operatin# at a profit, the cash inflow resultin# from the depreciation
ta3 shield is computed *y multiplyin# the depreciation deduction *y one minus the ta3
rate.
AICA F$: %eportin# Appendi3: 10C &': 6 &evel: /edium
10. All cash inflows are ta3a*le.
AICA F$: %eportin# Appendi3: 10C &': 6 &evel: ,asy
14-8 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
12. !he after1ta3 *enefit, or net cash inflow, reali<ed from a particular ta3a*le cash receipt
can *e o*tained *y multiplyin# the cash receipt *y one minus the ta3 rate.
Multiple Choice Questions
1+. Suture Corporation=s discount rate is 1(>. If Suture has a 21year investment pro4ect
that has a pro4ect profita*ility inde3 of <ero, this means that:
A? the net present value of the pro4ect is e7ual to <ero.
B? the internal rate of return of the pro4ect is e7ual to the discount rate.
C? the pay*ac" period of the pro4ect is e7ual to the pro4ect=s useful life.
.? *oth A and B a*ove are true.
Ans: . AACSB: Analytic AICA BB: Critical !hin"in#
AICA F$: %eportin# &': 1,(,0,2 &evel: )ard
15. Amster Corporation has not yet decided on the re7uired rate of return to use in its
capital *ud#etin#. !his lac" of information will prevent Amster from calculatin# a
pro4ect=s:
ay*ac" $et resent @alue Internal %ate of %eturn
A? $o $o $o
B? Aes Aes Aes
C? $o Aes Aes
.? $o Aes $o
AICA F$: %eportin# &': 1,(,2 &evel: /edium Source: C/A, adapted
16. If income ta3es are i#nored, how is depreciation used in the followin# capital
*ud#etin# techni7uesB
Internal %ate of %eturn $et resent @alue
A? ,3cluded ,3cluded
B? ,3cluded Included
C? Included ,3cluded
.? Included Included
Ans: A AACSB: Analytic AICA BB: Critical !hin"in#
AICA F$: %eportin# &': 1,( &evel: /edium Source: CA, adapted
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-
18. If the net present value of a pro4ect is <ero *ased on a discount rate of 1+>, then the
internal rate of return is:
A? e7ual to 1+>.
B? less than 1+>.
C? #reater than 1+>.
.? cannot *e determined from this data.
AICA F$: %eportin# &': 1,( &evel: /edium
(;. !hree potential investment pro4ects CA, B, and C? at $it Corporation all re7uire the
same initial investment, have the same useful life C- years?, and have no e3pected
salva#e value. ,3pected net cash inflows from these three pro4ects each year is as
follows:
A B C
Aear 1......... D1,;;; D(,;;; D-,;;;
Aear (......... D(,;;; D(,;;; D(,;;;
Aear -......... D-,;;; D(,;;; D1,;;;
What can *e determined from the information provided a*oveB
A? the net present value of pro4ect C will *e the hi#hest.
B? the internal rate of return of pro4ects A and C cannot *e computed.
C? the net present value and the internal rate of return will *e the same for all three
pro4ects.
.? *oth A and B a*ove.
AICA F$: %eportin# &': 1 &evel: )ard
(1. A pro4ect=s net present value, i#norin# income ta3es, is affected *y:
A? the net *oo" value of an asset that is replaced.
B? the depreciation on an asset that is replaced.
C? the depreciation to *e ta"en on assets used directly on the pro4ect.
.? proceeds from the sale of an asset that is replaced.
AICA F$: %eportin# &': 1 &evel: ,asy Source: CA, adapted
14-1! Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
((. A company has unlimited funds to invest at its discount rate. !he company should
invest in all pro4ects havin#:
A? an internal rate of return #reater than <ero.
B? a net present value #reater than <ero.
C? a simple rate of return #reater than the discount rate.
.? a pay*ac" period less than the pro4ect=s estimated life.
Ans: B AACSB: %eflective !hin"in# AICA BB: Critical !hin"in#
AICA F$: %eportin# &': 1 &evel: ,asy Source: C/A, adapted
(-. When the cash flows are the same every period after the initial investment in a pro4ect,
the pay*ac" period is e7ual to:
A? the net present value.
B? the simple rate of return.
C? the factor of the internal rate of return.
.? the pay*ac" rate of return.
Ans: C AACSB: Analytic AICA BB: Critical !hin"in#
AICA F$: %eportin# &': (,2 &evel: )ard Source: C/A, adapted
(0. !he internal rate of return method assumes that a pro4ect=s cash flows are reinvested at
the:
A? internal rate of return.
B? simple rate of return.
C? re7uired rate of return.
.? pay*ac" rate of return.
Ans: A AACSB: %eflective !hin"in# AICA BB: Critical !hin"in#
AICA F$: %eportin# &': ( &evel: /edium Source: C/A, adapted
(2. CI#nore income ta3es in this pro*lem.? Which of the followin# would *e used in the
calculation of the internal rate of return of an investment in new machinery to replace
old machineryB
A? !he annual depreciation e3pense on the new machinery.
B? !he cost of an overhaul that would *e needed on the old machinery in three
years.
C? !he salva#e value of the old machinery in ten years.
.? *oth B and C a*ove.
(+. !he pro4ect profita*ility inde3 and the internal rate of return:
A? will always result in the same preference ran"in# for investment pro4ects.
B? will sometimes result in different preference ran"in#s for investment pro4ects.
C? are less dependa*le than the pay*ac" method in ran"in# investment pro4ects.
.? are less dependa*le than net present value in ran"in# investment pro4ects.
Ans: B AACSB: Analytic AICA BB: Critical !hin"in#
AICA F$: %eportin# &': 0,2 &evel: /edium
(5. Eonifu#al Corporation needs to purchase a new conveyor system for its factory. Four
different conveyor systems have *een proposed. Which calculation would *e the *est
one for Eonifu#al to use to determine which system to purchaseB
A? pay*ac" period
B? simple rate of return
C? net present value
.? pro4ect profita*ility inde3
(6. A preference decision:
A? is concerned with whether a pro4ect clears the minimum re7uired rate of return
hurdle.
B? comes *efore the screenin# decision.
C? is concerned with determinin# which of several accepta*le alternatives is *est.
.? responses A, B, and C are all correct.
(8. In an e7uipment investment decision, which of the followin# amounts would *e
unaffected *y a chan#e in the ta3 rateB
A? the present value of the initial investment in the e7uipment.
B? the present value of the increase in wor"in# capital needed.
C? the present value of the salva#e value of the e7uipment.
.? *oth A and B a*ove.
14-1" Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
-;. When evaluatin# a pro4ect, the portion of the fi3ed corporate head7uarters e3pense
that would *e allocated to the pro4ect should *e:
A? included as a cash outflow on an after1ta3 *asis *y multiplyin# the e3pense *y
one minus the ta3 rate.
B? included as a cash outflow on an after1ta3 *asis *y multiplyin# the e3pense *y
the ta3 rate.
C? included as a cash outflow on a *efore1ta3 *asis.
.? i#nored.
AICA F$: %eportin# Appendi3: 10C &': 6 &evel: )ard
-1. CI#nore income ta3es in this pro*lem.? Fiven the followin# data:
Cost of e7uipment.............. D22,52;
Annual cash inflows........... D1;,;;;
Internal rate of return......... 1+>
!he life of the e7uipment must *e:
A? it is impossi*le to determine from the data #iven
B? 12 years
C? 1(.2 years
.? 2.52 years
AICA F$: %eportin# &': ( &evel: )ard
Solution:
!he internal rate of return factor is 2.252, or D22,52; G D1;,;;;. In the ta*le for the
resent @alue of an Annuity of D1 in Arrears, the factor of 2.252 can *e found in the
1+> column in the 12
th
rowH 12 then represents the life of the e7uipment.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-1#
-(. CI#nore income ta3es in this pro*lem.? )eap Company is considerin# an investment in
a pro4ect that will have a two year life. !he pro4ect will provide a 1;> internal rate of
return, and is e3pected to have a D0;,;;; cash inflow the first year and a D2;,;;; cash
inflow in the second year. What investment is re7uired in the pro4ectB
A? D50,-0;
B? D55,++;
C? D61,61;
.? D8;,;;;
AICA F$: %eportin# &': 1,( &evel: )ard Source: C/A, adapted
Solution:
AearCs? Amount 1;> Factor @
Cash inflowI1
st
year.......... 1 0;,;;; ;.8;8 D-+,-+;
Cash inflowI(
nd
year.......... ( 2;,;;; ;.6(+ 01,-;;
$et present value................ D55,++;
For the net present value of this pro4ect to *e <ero, the initial investment should *e
e7ual to the present value of the cash inflows, or D55,++;.
--. CI#nore income ta3es in this pro*lem.? Con#ener Bevera#e Corporation is considerin#
an investment in a capital *ud#etin# pro4ect that has an internal rate of return of (;>.
!he only cash outflow for this pro4ect is the initial investment. !he pro4ect is estimated
to have an 6 year life and no salva#e value. Cash inflows from this pro4ect are
e3pected to *e D1;;,;;; per year in each of the 6 years. Con#ener=s discount rate is
1+>. What is the net present value of this pro4ectB
A? D2,(12
B? D12,0+0
C? D2;,5;;
.? D22,6-1
AICA F$: %eportin# &': 1,( &evel: )ard
Solution:
Internal rate of return factor J Initial investment G Annual inflows
&oo" up the factor in the ta*le resent @alue of an Annuity of D1 in Arrears for 6
periods, (;> columnH the factor is -.6-5. Su*stitutin# into the a*ove e7uation, -.6-5 J
Initial investment G D1;;,;;;
Initial investment J D-6-,5;;.
AearCs? Amount 1+> Factor @
Initial investment............... $ow CD-6-,5;;? 1.;;; CD-6-,5;;?
Annual net cash receipts.... 116 D1;;,;;; 0.-00 0-0,0;;
$et present value................ D 2;,5;;
-0. CI#nore income ta3es in this pro*lem.? !he A*le Company is considerin# *uyin# a
new donut ma"er. !his machine will replace an old donut ma"er that still has a useful
life of ( years. !he new machine will cost D(,2;; a year to operate, as opposed to the
old machine, which costs D(,5;; per year to operate. Also, *ecause of increased
capacity, an additional 1;,;;; donuts a year can *e produced. !he company ma"es a
contri*ution mar#in of D;.;( per donut. !he old machine can *e sold for D2,;;; and
the new machine costs D(2,;;;. !he incremental annual net cash inflows provided *y
the new machine would *e:
A? D(;;
B? D0;;
C? D2,(;;
.? D2,0;;
Solution:
'peratin# cost savin#s per year CD(,5;; I D(,2;;?........................ D(;;
Additional contri*ution mar#in provided *y the new donut ma"er
CD;.;( K 1;,;;;?.......................................................................... (;;
Incremental annual net cash inflows provided *y new machine.... D0;;
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-1$
-2. CI#nore income ta3es in this pro*lem.? Fiven the followin# data:
Initial investment............... D6;,;;;
Annual cash inflow............ B
Salva#e value..................... D;
$et present value................ D1-,+;;
&ife of the pro4ect............... + years
.iscount rate...................... 1+>
Based on the data #iven a*ove, the annual cash inflow from the pro4ect after the initial
investment is closest to:
A? D2;,11+
B? D(1,51;
C? D(2,0;;
.? D-6,-5+
Solution:
First, set up ta*le:
Initial investment............... $ow D6;,;;; 1.;;; CD6;,;;;?
Annual cash inflows........... 11+ B -.+62 B
$et present value................ D1-,+;;
Second, solve for the present value of the annual cash inflow:
@ of annual cash inflow J D1-,+;; I C1D6;,;;;? J D8-,+;;
Finally, solve for the annual cash inflow:
Annual cash inflow K -.+62 J D8-,+;;
Annual cash inflow J D(2,0;;
14-1% Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
-+. CI#nore income ta3es in this pro*lem.? @ir#inia Company invested in a four1year
pro4ect. @ir#inia=s discount rate is 1;>. !he cash inflows from this pro4ect are:
Aear Cash Inflow
1 D0,;;;
( D0,0;;
- D0,6;;
0 D2,(;;
Assumin# a positive net present value of D1,;;;, the amount of the ori#inal investment
was closest to:
A? D(,22(
B? D0,22(
C? D1-,0(5
.? D15,0;;
AICA F$: %eportin# &': 1 &evel: )ard Source: CA, adapted
Solution:
$et present value of cash inflows I 'ri#inal investment J $et present value of pro4ect
'ri#inal investment J $@ of cash inflows I $@ of pro4ect
J D10,0(5 I D1,;;; J D1-,0(5
Aear 1 inflow................................ 1 D0,;;; ;.8;8 D -,+-+
Aear ( inflow................................ ( D0,0;; ;.6(+ -,+-0
Aear - inflow................................ - D0,6;; ;.521 -,+;2
Aear 0 inflow................................ 0 D2,(;; ;.+6- -,22(
$et present value of cash inflows D10,0(5
-5. CI#nore income ta3es in this pro*lem.? ara Corporation is reviewin# the followin#
data relatin# to an ener#y savin# investment proposal:
&ife of the pro4ect............... 2 years
Salva#e value..................... D1;,;;;
Annual cash savin#s........... B
What annual cash savin#s would *e needed in order to satisfy the company=s 1(>
re7uired rate of return Crounded to the nearest one hundred dollars?B
A? D1;,+;;
B? D11,1;;
C? D1(,-;;
.? D1-,8;;
AICA F$: %eportin# &': 1 &evel: )ard Source: CA, adapted
Solution:
Aears Amount 1(> Factor resent @alue
!otal investment................. $ow CD2;,;;;? 1.;;; CD2;,;;;?
Annual cash savin#s........... 112 B -.+;2 B
Salva#e value..................... 2 D1;,;;; ;.2+5 2,+5;
$et present value................ D ;
!o solve for the present value of the annual cash savin#s:
1D2;,;;; L @ of annual cash savin#s L D2,+5; J D;
@ of annual cash savin#s J D00,--;
!o solve for the amount of the annual cash savin#s:
Amount of annual cash savin#s K -.+;2 J D00,--;
Amount of annual cash savin#s J D1(,(85, which rounds to D1(,-;;
-6. CI#nore income ta3es in this pro*lem.? $evus !attoo arlor is considerin# a capital
*ud#etin# pro4ect. !his pro4ect will initially re7uire a D(2,;;; investment in
e7uipment and a D-,;;; wor"in# capital investment. !he useful life of this pro4ect is 2
years with an e3pected salva#e value of <ero on the e7uipment. !he wor"in# capital
will *e released at the end of the 2 years. !he new system is e3pected to #enerate net
cash inflows of D8,;;; per year in each of the 2 years. $evus= discount rate is 10>.
!he net present value of this pro4ect is closest to:
A? DC-,;66?
B? D-,-6-
C? D0,020
.? D2,685
Solution:
AearCs? Amount 10> Factor @
Initial investment............... $ow CD(2,;;;? 1.;;; CD(2,;;;?
Wor"in# capital needed...... $ow CD-,;;;? 1.;;; C -,;;;?
Annual cost savin#s........... 112 D8,;;; -.0-- -;,685
Wor"in# capital released.... 2 D-,;;; ;.218 1,225
$et present value................ D 0,020
-8. CI#nore income ta3es in this pro*lem.? !he /alaise revention A#ency is a non1profit
or#ani<ation that does all of its own informational printin#. !he printin# press that
/alaise currently is usin# needs a D(;,;;; overhaul. !his will e3tend the useful life of
the press *y 6 years. As an alternative, /alaise could *uy a *rand new modern press
for D02,;;;. !he new press would also last 6 years. !he annual operatin# e3penses of
the old press are D1(,;;;. !he annual operatin# e3penses of the new press will only *e
D5,;;;. !he old press is not e3pected to have a salva#e value in 6 years. !he new press
is e3pected to have a D+,;;; salva#e value in 6 years. /alaise=s discount rate is 10>.
!he net present value of the decision to *uy the new press instead of overhaulin# the
old press is closest to:
A? D-;1
B? DC-;1?
C? D0,182
.? DC0+,;68?
Solution:
Initial investment............... $ow CD02,;;;? 1.;;; CD02,;;;?
Annual cost savin#s
CD1(,;;; I D5,;;;?......... 116 D2,;;; 0.+-8 (-,182
Salva#e value..................... 6 D+,;;; ;.-21 (,1;+
$et present value of new
press................................ CD18,+88?
Cost to overhaul old press................ D(;,;;;
$@ of new press............................. 18,+88
$@ of new press vs. old press........ D -;1
14-"! Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
0;. CI#nore income ta3es in this pro*lem.? $evland Corporation is considerin# the
purchase of a machine that would cost D1-;,;;; and would last for + years. At the end
of + years, the machine would have a salva#e value of D16,;;;. By reducin# la*or and
other operatin# costs, the machine would provide annual cost savin#s of D00,;;;. !he
company re7uires a minimum preta3 return of 18> on all investment pro4ects. !he net
present value of the proposed pro4ect is closest to:
A? D-6,;0;
B? D(+,-5+
C? D50,8;(
.? D(;,;0;
Solution:
Initial investment............... $ow CD1-;,;;;? 1.;;; CD1-;,;;;?
Annual cost savin#s........... 11+ D00,;;; -.01; 12;,;0;
Salva#e value..................... + D16,;;; ;.-2( +,--+
$et present value................ D (+,-5+
01. CI#nore income ta3es in this pro*lem? !he mana#ement of enfold Corporation is
considerin# the purchase of a machine that would cost D00;,;;;, would last for 5
years, and would have no salva#e value. !he machine would reduce la*or and other
costs *y D1;(,;;; per year. !he company re7uires a minimum preta3 return of 1+> on
all investment pro4ects. !he net present value of the proposed pro4ect is closest to:
A? 1D(6,;((
B? D8+,808
C? 1D58,18+
.? D(50,;;;
Solution:
Initial investment............... $ow CD00;,;;;? 1.;;; CD00;,;;;?
Annual cost savin#s........... 115 D1;(,;;; 0.;-8 011,856
$et present value................ CD (6,;((?
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-"1
0(. CI#nore income ta3es in this pro*lem.? .owlen, Inc., is considerin# the purchase of a
machine that would cost D12;,;;; and would last for + years. At the end of + years,
the machine would have a salva#e value of D(-,;;;. !he machine would reduce la*or
and other costs *y D-+,;;; per year. Additional wor"in# capital of D+,;;; would *e
needed immediately. All of this wor"in# capital would *e recovered at the end of the
life of the machine. !he company re7uires a minimum preta3 return of 1(> on all
investment pro4ects. !he net present value of the proposed pro4ect is closest to:
A? D8,+25
B? 1D(,;;0
C? D+,+88
.? D1-,((-
Solution:
AearCs? Amount 1(> Factor @
Wor"in# capital needed...... $ow CD+,;;;? 1.;;; C+,;;;?
Annual cost savin#s........... 11+ D-+,;;; 0.111 105,88+
Wor"in# capital released.... + D+,;;; ;.2;5 -,;0(
Salva#e value..................... + D(-,;;; ;.2;5 11,++1
$et present value................ D +,+88
0-. CI#nore income ta3es in this pro*lem.? !he oteran Company is considerin# a machine
that will save D-,;;; a year in cash operatin# costs each year for the ne3t si3 years. At
the end of si3 years it would have no salva#e value. If this machine costs D8,;+; now,
the machine=s internal rate of return is closest to:
A? 16>
B? (;>
C? ((>
.? (0>
Solution:
Factor of the internal rate of return
J Investment re7uired G $et annual cash inflow J D8,;+; G D-,;;; J -.;(;
!he factor of -.;(; for + years represents an internal rate of return of (0>.
14-"" Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
00. CI#nore income ta3es in this pro*lem? !he mana#ement of ,lamin Corporation is
considerin# the purchase of a machine that would cost D-+2,+82 and would have a
useful life of 8 years. !he machine would have no salva#e value. !he machine would
reduce la*or and other operatin# costs *y D+1,;;; per year. !he internal rate of return
on the investment in the new machine is closest to:
A? 8>
B? 11>
C? 1(>
.? 1;>
AICA F$: %eportin# &': ( &evel: ,asy
Solution:
J Investment re7uired G $et annual cash inflow J D-+2,+82 G D+1,;;; J 2.882
!he factor of 2.882 for 8 years represents an internal rate of return of 8>.
02. CI#nore income ta3es in this pro*lem.? Bau &on#1)aul, Inc., is considerin# the
purchase of a tractor1trailer that would cost D(61,+2+, would have a useful life of 5
years, and would have no salva#e value. !he tractor1trailer would *e used in the
company=s haulin# *usiness, resultin# in additional net cash inflows of D5+,;;; per
year. !he internal rate of return on the investment in the tractor1trailer is closest to:
A? 18>
B? 16>
C? (1>
.? 1+>
Solution:
J Investment re7uired G $et annual cash inflow J D(61,+2+ G D5+,;;; J -.5;+
!he factor of -.5;+ for 5 years represents an internal rate of return of 18>.
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-"#
0+. CI#nore income ta3es in this pro*lem.? Fola* %oofin# is considerin# the purchase of a
crane that would cost D+8,60+, would have a useful life of + years, and would have no
salva#e value. !he use of the crane would result in la*or savin#s of D(1,;;; per year.
!he internal rate of return on the investment in the crane is closest to:
A? 16>
B? (;>
C? 18>
.? 15>
Solution:
J Investment re7uired G $et annual cash inflow J D+8,60+ G D(1,;;; J -.-(+
!he factor of -.-(+ for + years represents an internal rate of return of (;>.
05. CI#nore income ta3es in this pro*lem? Boe Corporation is investi#atin# *uyin# a small
used aircraft for the use of its e3ecutives. !he aircraft would have a useful life of 8
years. !he company uses a discount rate of 1;> in its capital *ud#etin#. !he net
present value of the investment, e3cludin# the salva#e value of the aircraft, is 1
D0-8,2(5. /ana#ement is havin# difficulty estimatin# the salva#e value of the
aircraft. !o the nearest whole dollar how lar#e would the salva#e value of the aircraft
have to *e to ma"e the investment in the aircraft financially attractiveB
A? D0-8,2(5
B? D0-,82-
C? D0,-82,(5;
.? D1,;-+,+(;
AICA F$: %eportin# &': - &evel: ,asy
Solution:
/inimum salva#e value
J $e#ative net present value to the offset G resent value factor
J D0-8,2(5 G ;.0(0 J D1,;-+,+1- Canswer is sli#htly off due to roundin#?
14-"4 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
06. CI#nore income ta3es in this pro*lem? !he mana#ement of Byr#e Corporation is
investi#atin# *uyin# a small used aircraft to use in ma"in# air*orne inspections of its
a*ove1#round pipelines. !he aircraft would have a useful life of 6 years. !he company
uses a discount rate of 1;> in its capital *ud#etin#. !he net present value of the
investment, e3cludin# the intan#i*le *enefits, is 1D006,0+;. !o the nearest whole
dollar how lar#e would the annual intan#i*le *enefit have to *e to ma"e the
investment in the aircraft financially attractiveB
A? D00,60+
B? D2+,;26
C? D60,;+;
.? D006,0+;
Solution:
/inimum annual cash flows from the intan#i*le *enefits
J $e#ative net present value to *e offset G resent value factor
J D006,0+; G 2.--2 J D60,;+;
08. CI#nore income ta3es in this pro*lem? !he mana#ement of 's*orn Corporation is
investi#atin# an investment in e7uipment that would have a useful life of 6 years. !he
company uses a discount rate of 1(> in its capital *ud#etin#. !he net present value of
the investment, e3cludin# the annual cash inflow, is 1D0;1,010. !o the nearest whole
dollar how lar#e would the annual cash inflow have to *e to ma"e the investment in
the e7uipment financially attractiveB
A? D06,15;
B? D2;,155
C? D6;,6;;
.? D0;1,010
Solution:
/inimum annual cash flows
J D0;1,010 G 0.8+6 J D6;,6;;
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-"$
2;. CI#nore income ta3es in this pro*lem.? Croce, Inc., is investi#atin# an investment in
e7uipment that would have a useful life of 5 years. !he company uses a discount rate
of 6> in its capital *ud#etin#. !he net present value of the investment, e3cludin# the
salva#e value, is 1D212,8+5. !o the nearest whole dollar how lar#e would the salva#e
value of the e7uipment have to *e to ma"e the investment in the e7uipment financially
attractiveB
A? D01,(55
B? D662,;(1
C? D212,8+5
.? D+,008,266
Solution:
J D212,8+5 G ;.26- J D662,;(1
21. A pro4ect has an initial investment of D1;;,;;; and a pro4ect profita*ility inde3 of
;.12. !he discount rate is 1(>. !he net present value of the pro4ect is closest to:
A? D12,;;;
B? D112,;;;
C? D11(,;;;
.? D1(,;;;
AICA F$: %eportin# &': 0 &evel: /edium Source: C/A, adapted
Solution:
ro4ect profita*ility inde3 J $et present value G Investment re7uired
;.12 J $et present value G D1;;,;;;
$et present value J D12,;;;
14-"% Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
2(. A company is ponderin# an investment pro4ect that has an internal rate of return which
is e7ual to the company=s discount rate. !he pro4ect profita*ility inde3 of this
investment pro4ect is:
A? ;.;
B? ;.2
C? 1.;
.? 1.2
2-. CI#nore income ta3es in this pro*lem.? !he mana#ement of Solar Corporation is
considerin# the followin# three investment pro4ects:
ro4ect & ro4ect / ro4ect $
Investment re7uired....................... D-5,;;; D22,;;; D6(,;;;
resent value of cash inflows......... D-6,06; D+(,12; D8;,(;;
%an" the pro4ects accordin# to the profita*ility inde3, from most profita*le to least
profita*le.
A? /,$,&
B? &,$,/
C? $,&,/
.? $,/,&
Solution:
ro4ect & ro4ect / ro4ect $
Investment re7uired Ca?......................... CD-5,;;;? CD22,;;;? CD6(,;;;?
resent value of cash inflows............... -6,06; +(,12; 8;,(;;
$et present value C*?............................. D 1,06; D 5,12; D 6,(;;
ro4ect profita*ility inde3 C*? G Ca?....... ;.;0 ;.1- ;.1;
%an"ed *y pro4ect profita*ility inde3... - 1 (
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-"7
20. CI#nore income ta3es in this pro*lem.? !rovato Corporation is considerin# a pro4ect
that would re7uire an investment of D06,;;;. $o other cash outflows would *e
involved. !he present value of the cash inflows would *e D21,60;. !he profita*ility
inde3 of the pro4ect is closest to:
A? ;.;5
B? ;.;6
C? ;.8(
.? 1.;6
Solution:
ro4ect M
Investment re7uired Ca?......................... CD06,;;;?
resent value of cash inflows............... 21,60;
$et present value C*?............................. D -,60;
ro4ect profita*ility inde3 C*? G Ca?....... ;.;6
22. CI#nore income ta3es in this pro*lem.? %yner Corporation is considerin# three
investment pro4ects1S, !, and N. ro4ect S would re7uire an investment of D(;,;;;,
ro4ect ! of D+8,;;;, and ro4ect N of D6-,;;;. $o other cash outflows would *e
involved. !he present value of the cash inflows would *e D(-,(;; for ro4ect S,
D55,85; for ro4ect !, and D80,+(; for ro4ect N. %an" the pro4ects accordin# to the
profita*ility inde3, from most profita*le to least profita*le.
A? N,!,S
B? !,S,N
C? N,S,!
.? S,N,!
Solution:
ro4ect S ro4ect ! ro4ect N
Investment re7uired Ca?......................... CD(;,;;;? CD+8,;;;? CD6-,;;;?
resent value of cash inflows............... (-,(;; 55,85; 80,+(;
$et present value C*?............................. D -,(;; D 6,85; D11,+(;
ro4ect profita*ility inde3 C*? G Ca?....... ;.1+ ;.1- ;.10
%an"ed *y pro4ect profita*ility inde3... 1 - (
14-"8 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
2+. CI#nore income ta3es in this pro*lem.? !he mana#ement of &eitheiser Corporation is
considerin# a pro4ect that would re7uire an initial investment of D21,;;;. $o other
cash outflows would *e re7uired. !he present value of the cash inflows would *e
D25,+-;. !he profita*ility inde3 of the pro4ect is closest to:
A? 1.1-
B? ;.65
C? ;.1-
.? ;.1(
Solution:
ro4ect M
resent value of cash inflows............... 25,+-;
$et present value C*?............................. D +,+-;
ro4ect profita*ility inde3 C*? G Ca?....... ;.1-
25. CI#nore income ta3es in this pro*lem.? 'linic" Corporation is considerin# a pro4ect
that would re7uire an investment of D-0-,;;; and would last for 6 years. !he
incremental annual revenues and e3penses #enerated *y the pro4ect durin# those 6
years would *e as follows:
Sales................................... D((5,;;;
@aria*le e3penses............... 2(,;;;
Contri*ution mar#in........... 152,;;;
Fi3ed e3penses:
Salaries............................ (5,;;;
%ents............................... 01,;;;
.epreciation.................... 0;,;;;
!otal fi3ed e3penses........... 1;6,;;;
$et operatin# income......... D +5,;;;
!he scrap value of the pro4ect=s assets at the end of the pro4ect would *e D(-,;;;. !he
pay*ac" period of the pro4ect is closest to:
A? -.; years
B? 2.1 years
C? -.( years
.? 0.6 years
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-"
Solution:
$et annual cash flow J $et operatin# income L .epreciation
J D+5,;;; L D0;,;;; J D1;5,;;;
ay*ac" period J Investment re7uired G $et annual cash flow
J D-0-,;;; G D1;5,;;; J -.( years
In this case the salva#e value plays no part in the pay*ac" period since all of the
investment is recovered *efore the end of the pro4ect.
26. CI#nore income ta3es in this pro*lem.? !he mana#ement of &an<ilotta Corporation is
considerin# a pro4ect that would re7uire an investment of D(+-,;;; and would last for
6 years. !he annual net operatin# income from the pro4ect would *e D++,;;;, which
includes depreciation of D-1,;;;. !he scrap value of the pro4ect=s assets at the end of
the pro4ect would *e D12,;;;. !he pay*ac" period of the pro4ect is closest to:
A? -.6 years
B? (.+ years
C? (.5 years
.? 0.; years
Solution:
$et annual cash flow J $et operatin# income L .epreciation
J D++,;;; L D-1,;;; J D85,;;;
ay*ac" period J Investment re7uired G $et annual cash flow
J D(+-,;;; G D85,;;; J (.5 years
14-#! Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
28. CI#nore income ta3es in this pro*lem.? Slom"ows"i Corporation is contemplatin#
purchasin# e7uipment that would increase sales revenues *y D(86,;;; per year and
cash operatin# e3penses *y D10-,;;; per year. !he e7uipment would cost D51(,;;;
and have a 6 year life with no salva#e value. !he annual depreciation would *e
D68,;;;. !he simple rate of return on the investment is closest to:
A? 8.->
B? (1.6>
C? ((.1>
.? 1(.2>
AICA F$: %eportin# &': + &evel: ,asy
Solution:
!he simple rate of return is computed as follows:
Cost of machine, net of salva#e value Ca?........... D51(,;;;
Nseful life C*?...................................................... 6 years
Annual depreciation Ca? G C*?.............................. D68,;;;
Annual incremental revenue CD(86,;;; I
D10-,;;;?......................................................... D122,;;;
&ess annual depreciation..................................... 68,;;;
Annual incremental net operatin# income.......... D ++,;;;
Simple rate of return J Annual incremental net operatin# income G Initial investment
J D++,;;; G D51(,;;; J 8.->
+;. CI#nore income ta3es in this pro*lem.? !he mana#ement of lotni" Corporation is
investi#atin# purchasin# e7uipment that would increase sales revenues *y D(+8,;;;
per year and cash operatin# e3penses *y D12+,;;; per year. !he e7uipment would cost
D(80,;;; and have a + year life with no salva#e value. !he simple rate of return on the
investment is closest to:
A? 1+.5>
B? -6.0>
C? (-.6>
.? (1.6>
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-#1
Solution:
Cost of machine, net of salva#e value Ca?.......................... D(80,;;;
Nseful life C*?..................................................................... + years
Annual depreciation Ca? G C*?............................................. D08,;;;
Annual incremental revenue CD(+8,;;; I D12+,;;;?........ D11-,;;;
&ess annual depreciation.................................................... 08,;;;
Annual incremental net operatin# income......................... D +0,;;;
J D+0,;;; G D(80,;;; J (1.6>
+1. CI#nore income ta3es in this pro*lem.? An e3pansion at Fey, Inc., would increase sales
revenues *y D12;,;;; per year and cash operatin# e3penses *y D05,;;; per year. !he
initial investment would *e for e7uipment that would cost D-(6,;;; and have a 6 year
life with no salva#e value. !he annual depreciation on the e7uipment would *e
D01,;;;. !he simple rate of return on the investment is closest to:
A? 01.->
B? 16.8>
C? 1(.2>
.? -1.0>
Solution:
Annual incremental revenue CD12;,;;; I D05,;;;?............. D1;-,;;;
&ess annual depreciation....................................................... 01,;;;
Annual incremental net operatin# income............................ D +(,;;;
J D+(,;;; G D-(6,;;; J 16.8>
14-#" Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
+(. CI#nore income ta3es in this pro*lem.? Crowl Corporation is investi#atin# automatin#
a process *y purchasin# a machine for D58(,;;; that would have a 8 year useful life
and no salva#e value. By automatin# the process, the company would save D1-(,;;;
per year in cash operatin# costs. !he new machine would replace some old e7uipment
that would *e sold for scrap now, yieldin# D(1,;;;. !he annual depreciation on the
new machine would *e D66,;;;. !he simple rate of return on the investment is closest
to:
A? 11.1>
B? 1+.5>
C? 2.5>
.? 2.+>
Solution:
Cost of machine, net of scrap Ca? CD58(,;;; I D(1,;;;?. . D551,;;;
Annual cost savin#s.......................................................... D1-(,;;;
&ess annual depreciation.................................................. 66,;;;
Annual incremental net operatin# income........................ D 00,;;;
J D00,;;; G D551,;;; J 2.5>
+-. CI#nore income ta3es in this pro*lem.? !he mana#ement of %o Corporation is
investi#atin# automatin# a process. 'ld e7uipment, with a current salva#e value of
D11,;;;, would *e replaced *y a new machine. !he new machine would *e purchased
for D(0-,;;; and would have a 8 year useful life and no salva#e value. By automatin#
the process, the company would save D+8,;;; per year in cash operatin# costs. !he
simple rate of return on the investment is closest to:
A? 16.1>
B? 11.1>
C? (6.0>
.? 15.->
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-##
Solution:
Cost of machine, net of salva#e value Ca?........... D(0-,;;;
Annual depreciation Ca? G C*?.............................. D(5,;;;
Annual cost savin#s............................................ D+8,;;;
&ess annual depreciation..................................... (5,;;;
Annual incremental net operatin# income.......... D0(,;;;
Simple rate of return J Annual incremental net operatin# income G Initial investment,
less salva#e value J D0(,;;; G CD(0-,;;; I D11,;;;? J 16.1>
+0. CI#nore income ta3es in this pro*lem.? A company wants to have D(;,;;; at the end
of a ten1year period *y investin# a sin#le sum now. )ow much needs to *e invested in
order to have the desired sum in ten years, if the money can *e invested at 1(>B
A? D-,(20.+6
B? D-,2-8.6(
C? D+,00;.;;
.? D5,5(;.;;
Solution:
Factor from resent @alue of D1 ta*le, 1(>, 1; years: ;.-((
D(;,;;; K ;.-(( J D+,00;.;;
14-#4 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
+2. CI#nore income ta3es in this pro*lem.? At an interest rate of 10>, appro3imately how
much would you need to invest today if you wanted to have D(,;;;,;;; in 1; yearsB
A? D-6-,0-+
B? D20;,;;;
C? D50;,501
.? D1,;0-,(;;
Solution:
Factor from resent @alue of D1 ta*le, 10>, 1; years: ;.(5;
D(,;;;,;;; K ;.(5; J D20;,;;;
++. CI#nore income ta3es in this pro*lem.? )ow much would you have to invest today in
the *an" at an interest rate of 6> to have an annuity of D0,6;; per year for 5 years,
with nothin# left in the *an" at the end of the 5 yearsB Select the amount *elow that is
closest to your answer.
A? D--,+;;
B? D(,586
C? D(0,868
.? D-1,111
Solution:
Factor from resent @alue of an Annuity of D1 in Arrears !a*le, 6>, 5 years: 2.(;+
D0,6;; K 2.(;+ J D(0,868
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-#$
+5. CI#nore income ta3es in this pro*lem.? Aou have deposited D(0,5+0 in a special
account that has a #uaranteed interest rate. If you withdraw D0,-;; at the end of each
year for 8 years, you will completely e3haust the *alance in the account. !he
#uaranteed interest rate is closest to:
A? +>
B? 1;>
C? 15>
.? 2+>
Solution:
D0,-;; K Factor from @ of Annuity ta*le J D(0,5+0
Factor from @ of Annuity ta*le J 2.528
&oo"in# in resent @alue of an Annuity of D1 in Arrears in the 8
th
row, 2.528 is found
in the 1;> column which is the #uaranteed interest rate.
+6. CI#nore income ta3es in this pro*lem.? Aou have deposited D5,+(; in a special account
that has a #uaranteed interest rate of 18> per year. If you are willin# to completely
e3haust the account, what is the ma3imum amount that you could withdraw at the end
of each of the ne3t 5 yearsB Select the amount *elow that is closest to your answer.
A? D1,(82
B? D(,;2+
C? D(,(18
.? D1,;68
Solution:
Factor from resent @alue of an Annuity of D1 in Arrears ta*le, 18>, 5 years: -.5;+
D5,+(; G -.5;+ J D(,;2+
14-#% Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
+8. CI#nore income ta3es in this pro*lem.? Suddeth Corporation has entered into a + year
lease for a *uildin# it will use as a warehouse. !he annual payment under the lease
will *e D(,0+6. !he first payment will *e at the end of the current year and all
su*se7uent payments will *e made at year1ends. What is the present value of the lease
payments if the discount rate is 2>B
A? D1(,2(6
B? D10,1;-
C? D10,6;6
.? D11,;2;
Solution:
Factor from resent @alue of an Annuity of D1 in Arrears ta*le, 2>, + years: 2.;5+
D(,0+6 K 2.;5+ J D1(,2(6
5;. CI#nore income ta3es in this pro*lem.? .ome*o Corporation has entered into a 5 year
lease for a piece of e7uipment. !he annual payment under the lease will *e D-,0;;,
with payments *ein# made at the *e#innin# of each year. If the discount rate is 10>,
the present value of the lease payments is closest to:
A? D8,211
B? D1+,+(-
C? D(;,655
.? D(-,6;;
Solution:
Annual payments made at the *e#innin# of the year mean that the first lease payment
would *e paid immediatelyH the present value of the first lease payment is therefore
D-,0;;. !he ne3t si3 lease payments for years (15 made at the *e#innin# of each year
is e7uivalent to si3 payments at the end of each year for years 1 throu#h +. !he ta*le
for the resent @alue of an Annuity of D1 in Arrears can *e used to calculate the years
11+.
Factor from resent @alue of an Annuity of D1 in Arrears ta*le, 10>, + years: -.668
CD-,0;; K -.668? L D-,0;; J D1+,+(-
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-#7
51. Wed#e Corporation uses a discount rate of 10> and has a ta3 rate of -;>. !he
followin# cash flows occur in the last year of a 1;1year e7uipment selection
investment pro4ect:
Cost savin#s for the year............................ D16;,;;;
Wor"in# capital released............................ D1(;,;;;
Salva#e value from sale of e7uipment....... D(2,;;;
At the end of the ten years when the e7uipment is sold, its net *oo" value for ta3
purposes is <ero. !he total after1ta3 present value of the cash flows a*ove is closest to:
A? D02,5+2
B? D06,0+2
C? D+1,0(2
.? D51,102
Solution:
Aears Amount
!a3
,ffect
$et cash inflow................... 1; D16;,;;; ;.5;
Salva#e value...................... 1; D(2,;;; ;.5;
Wor"in# capital released..... 1; D1(;,;;;
$et present value................
After1!a3
Cash
Flows
10>
Factor
resent
@alue
$et annual cash inflow....... D1(+,;;; ;.(5; D-0,;(;
Salva#e value...................... D15,2;; ;.(5; 0,5(2
Wor"in# capital released..... D1(;,;;; ;.(5; -(,0;;
$et present value................ D51,102
14-#8 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
5(. A company anticipates a ta3a*le cash receipt of D6;,;;; in year - of a pro4ect. !he
company=s ta3 rate is -;> and its discount rate is 1;>. !he present value of this future
cash flow is closest to:
A? D0(,;2+
B? D2+,;;;
C? D(0,;;;
.? D16,;-(
Solution:
After1ta3 cash flow J Before1ta3 cash flow K C1 I !a3 rate?
J D6;,;;; K C1 I ;.-;? J D2+,;;;
resent value factor from resent @alue of D1: ;.521
resent value J D2+,;;; K ;.521 J D0(,;2+
5-. A company anticipates a ta3a*le cash e3pense of D-;,;;; in year 0 of a pro4ect. !he
company=s ta3 rate is -;> and its discount rate is 10>. !he present value of this future
cash flow is closest to:
A? DC(1,;;;?
B? DC2,-(8?
C? DC8,;;;?
.? DC1(,0-(?
Solution:
After1ta3 cash flow J Before1ta3 cash flow K C1 I !a3 rate?
J D-;,;;; K C1 I ;.-;? J D(1,;;;
resent value factor from resent @alue of D1: ;.28(
resent value J D(1,;;; K ;.28( J D1(,0-(
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-#
50. A company anticipates a depreciation deduction of D5;,;;; in year 0 of a pro4ect. !he
company=s ta3 rate is -;> and its discount rate is 1(>. !he present value of the
depreciation ta3 shield resultin# from this deduction is closest to:
A? D-1,10;
B? D08,;;;
C? D(1,;;;
.? D1-,-2+
Solution:
.epreciation ta3 shield J D5;,;;; K -;> J D(1,;;;
resent value of depreciation shield J D(1,;;; K ;.+-+O J D1-,-2+
OFactor from resent @alue of D1 ta*le, 1(>, 0 years
52. A company needs an increase in wor"in# capital of D2;,;;; in a pro4ect that will last 0
years. !he company=s ta3 rate is -;> and its discount rate is 10>. !he present value of
the release of the wor"in# capital at the end of the pro4ect is closest to:
A? D12,;;;
B? D(;,5(-
C? D(8,+;;
.? D-2,;;;
Solution:
resent value of wor"in# capital release J D2;,;;; K ;.28(O J D(8,+;;
OFactor from resent @alue of D1 ta*le
5+. .unn Construction, Inc., has a lar#e crane that cost D-2,;;; when purchased ten years
a#o. .epreciation ta"en to date totals D(2,;;;. !he crane can *e sold now for D+,;;;.
Assumin# a ta3 rate of 0;>, if the crane is sold the total after1ta3 cash inflow for
capital *ud#etin# purposes will *e:
A? D6,0;;
B? D1(,;;;
C? D5,+;;
.? D1;,;;;
AICA F$: %eportin# Appendi3: 10C &': 6 &evel: )ard
Solution:
Sale proceeds....................................................... D +,;;;
&ess *oo" value of crane CD-2,;;; I D(2,;;;?.... 1;,;;;
&oss on sale of crane............................................ CD 0,;;;?
Cash proceeds from sale...................................... D+,;;;
Add ta3 *enefit of loss CD0,;;; K ;.0;?............... 1,+;;
!otal after1ta3 cash inflow from sale................... D5,+;;
55. If an investment of D8;,;;; made now has annual cash operatin# inflows of D2,;;;,
and if the ta3 rate is 0;>, then the after1ta3 cash operatin# inflow each year would *e:
A? D(,;;;
B? D-+,;;;
C? D-,;;;
.? D20,;;;
Solution:
After1ta3 cash operatin# inflow J D2,;;; K C1 P ;.0;? J D-,;;;
56. If a company=s income ta3 rate is -;> and its annual depreciation deduction is
D6;,;;;, then the annual ta3 savin#s from the depreciation ta3 shield is:
A? D2+,;;;
B? D(0,;;;
C? D6;,;;;
.? D-(,;;;
Solution:
Annual ta3 savin#s from depreciation ta3 shield J D6;,;;; K ;.-; J D(0,;;;
58. Farfield, Inc., is considerin# a ten1year investment pro4ect with forecasted cash
revenues of D0;,;;; per year and forecasted cash e3penses of D(8,;;; per year. !he
initial cost of the e7uipment for the pro4ect is D(-,;;;. !he salva#e value of the
e7uipment is D8,;;; at the end of the ten years of the pro4ect. !he net *oo" value of
the e7uipment for ta3 purposes will *e <ero at the end of the ten years. !he pro4ect
re7uires a wor"in# capital investment of D5,;;; at its inception and another wor"in#
capital infusion of D2,;;; at the end of year five. All of this wor"in# capital would *e
released for use elsewhere at the end of the pro4ect. !he company=s ta3 rate is 0;>.
What is the after1ta3 net cash flow in the tenth year of the pro4ectB
A? D-(,;;;
B? D(0,;;;
C? D(;,;;;
.? D11,;;;
Source: C/A, adapted
Solution:
Salva#e sale proceeds......... D8,;;;
&ess *oo" value.................. ;
Fain on sale........................ D8,;;;
$et after1ta3 cash flow in year 1;:
Fain on sale QD8,;;; K C1 I ;.0;?R....................................... D 2,0;;
Initial wor"in# capital.......................................................... 5,;;;
2
th
year wor"in# capital........................................................ 2,;;;
$et revenue per year QCD0;,;;; I D(8,;;;? K C1 I ;.0;?R.... +,+;;
$et after1ta3 cash flow......................................................... D(0,;;;
Nse the followin# to answer 7uestions 6;161:
!he Folden Company is analy<in# pro4ects A, B, and C as possi*le investment opportunities.
,ach of these pro4ects has a useful life of ei#ht years. !he followin# information has *een
o*tained:
ro4ect A ro4ect B ro4ect C
Initial investment....................................... D(2;,;;; D052,;;; D-6;,;;;
resent value of future net cash inflows.... D(8;,;;; D2;-,;;; D0((,;;;
Internal rate of return................................. 1+> (;> 16>
6;. Consider the followin# statements:
I. ro4ect A is preferred to ro4ect B accordin# to a net present value ran"in#.
II. ro4ect A is preferred to ro4ect B accordin# to an internal rate of return
ran"in#.
III. ro4ect A is preferred to ro4ect B accordin# to a pro4ect profita*ility inde3
ran"in#.
Which is trueB
A? 'nly I
B? 'nly II
C? 'nly I and II
.? 'nly I and III
ACIA F$: .ecision /a"in# AICA F$: %eportin# &': 1,(,0 &evel: ,asy
Solution:
Initial investment Ca?.................................. D(2;,;;; D052,;;; D-6;,;;;
$et present value C*?.................................. D0;,;;; D(6,;;; D0(,;;;
ro4ect profita*ility inde3 C*? G Ca?............ ;.1+ ;.;+ ;.11
61. Consider the followin# statements:
I. ro4ect A has the hi#hest ran"in# accordin# to the pro4ect profita*ility inde3
criterion.
II. ro4ect B has the hi#hest ran"in# accordin# to the internal rate of return
criterion.
III. ro4ect C has the hi#hest ran"in# accordin# to the net present value criterion.
Which is trueB
A? 'nly II
B? 'nly I and III
C? 'nly II and III
.? I, II and III
AICA F$: %eportin# &': 1,(,0 &evel: ,asy
Solution:
Initial investment Ca?.................................. D(2;,;;; D052,;;; D-6;,;;;
$et present value C*?.................................. D0;,;;; D(6,;;; D0(,;;;
ro4ect profita*ility inde3 C*? G Ca?............ ;.1+ ;.;+ ;.11
Nse the followin# to answer 7uestions 6(162:
CI#nore income ta3es in this pro*lem.? Chee Company has #athered the followin# data on a
proposed investment pro4ect:
Investment re7uired in e7uipment............. D(0;,;;;
Annual cash inflows................................... D2;,;;;
Salva#e value............................................. D;
&ife of the investment................................ 6 years
%e7uired rate of return............................... 1;>
6(. !he pay*ac" period for the investment is closest to:
A? ;.( years
B? (.2 years
C? 0.6 years
.? 2.; years
Solution:
ay*ac" period J Investment re7uired G Annual cash inflows
J D(0;,;;; G D2;,;;;
J 0.6 years
6-. !he simple rate of return on the investment is closest to:
A? 1(.2>
B? 1;.;>
C? (;.6>
.? 6.->
AICA F$: %eportin# &': + &evel: /edium
Solution:
Cost of machine, net of salva#e value Ca?. . D(0;,;;;
Nseful life C*?............................................. 6 years
Annual depreciation Ca? G C*?..................... D-;,;;;
Annual cash inflows................................... D2;,;;;
&ess annual depreciation............................ -;,;;;
Annual incremental net operatin# income. D(;,;;;
J D(;,;;; G D(0;,;;; J 6.->
60. !he net present value on this investment is closest to:
A? D1+;,;;;
B? D(0;,;(0
C? D26,6;;
.? D(+,52;
Solution:
Annual cash inflows..... 116 D2;,;;; 2.--2 D(++,52;
Initial investment......... $ow CD(0;,;;;? 1.;;; C (0;,;;;?
$et present value.......... D (+,52;
62. !he internal rate of return on the investment is closest to:
A? 11>
B? 1->
C? 12>
.? 15>
Solution:
J Investment re7uired G $et annual cash inflow J D(0;,;;; G D2;,;;; J 0.6;;
!he factor of 0.6;; for 6 years represents an internal rate of return of close to 1->.
Nse the followin# to answer 7uestions 6+165:
CI#nore income ta3es in this pro*lem.? !he %app Company is considerin# *uyin# a new
machine which will re7uire an initial outlay of D12,;;;. !he company estimates that over the
ne3t four years this machine would save D+,;;; per year in cash operatin# e3penses. At the
end of four years, the machine would have no salva#e value. !he company=s re7uired rate of
return is 10>.
6+. !he net present value of this investment is closest to:
A? DC1(,+-(?
B? D15,060
C? D(,060
.? D-,+1(
Solution:
Annual cost savin#s..... 110 D+,;;; (.810 D15,060
Initial investment......... $ow CD12,;;;? 1.;;; C 12,;;;?
$et present value.......... D (,060
65. !he machine=s internal rate of return is closest to:
A? 1+>
B? 16>
C? (;>
.? ((>
Solution:
Factor of the internal rate of return J Investment re7uired G $et annual cash inflow J
D12,;;; G D+,;;; J (.2;;
!he factor of (.2;; for 0 years represents an internal rate of return of almost ((>.
Nse the followin# to answer 7uestions 66168:
CI#nore income ta3es in this pro*lem.? Allo Foundation, a ta31e3empt or#ani<ation, invested
D(;;,;;; in cost1savin# e7uipment. !he e7uipment has a five1year useful life with no salva#e
value. Allo estimates that the annual cash savin#s from this pro4ect will amount to D+2,;;;.
'n investments of this type, Allo=s re7uired rate of return is 1(>.
66. !he net present value of the pro4ect is closest to:
A? D-0,-;;
B? D-+,0;;
C? D8;,;;;
.? D1(2,;;;
AICA F$: %eportin# &': 1 &evel: /edium Source: CA, adapted
Solution:
Annual cost savin#s..... 112 D+2,;;; -.+;2 D(-0,-(2
Initial investment......... $ow CD(;;,;;;? 1.;;; C (;;,;;;?
$et present value.......... D -0,-(2
68. Allo=s internal rate of return on this pro4ect is closest to:
A? 1->
B? 12>
C? 15>
.? 18>
AICA F$: %eportin# &': ( &evel: /edium Source: CA, adapted
Solution:
Factor of the internal rate of return J Investment re7uired G $et annual cash inflow J
D(;;,;;; G D+2,;;; J -.;55
!he factor of -.;55 for 2 years represents an internal rate of return of almost 18>.
Nse the followin# to answer 7uestions 8;181:
CI#nore income ta3es in this pro*lem.? .umora Corporation is considerin# an investment
pro4ect that will re7uire an initial investment of D8,0;; and will #enerate the followin# net
cash inflows in each of the five years of its useful life:
Aear 1 Aear ( Aear - Aear 0 Aear 2
$et cash inflows..... D1,;;; D(,;;; D0,;;; D+,;;; D2,;;;
.umoraSs discount rate is 1+>.
8;. .umora=s pay*ac" period for this investment pro4ect is closest to:
A? 1.81 years
B? (.+1 years
C? (.68 years
.? -.0; years
Solution:
Amount
%emainin#
Balance
Initial investment......... D8,0;;
Aear 1 cash inflow........ D1,;;; D6,0;;
Aear ( cash inflow........ D(,;;; D+,0;;
Aear - cash inflow........ D0,;;; D(,0;;
Aear 0: D(,0;; G D+,;;; J ;.0
!herefore, the pay*ac" period for this investment is -.0 years.
81. .umora=s net present value for this investment pro4ect is closest to:
A? DC6-(?
B? D1,(;0
C? D1,-5+
.? D(,-6+
Solution:
Cost savin#sIAear 1..... 1 D1,;;; ;.6+( D 6+(
Cost savin#sIAear (..... ( D(,;;; ;.50- 1,06+
Cost savin#sIAear -..... - D0,;;; ;.+01 (,2+0
Cost savin#sIAear 0..... 0 D+,;;; ;.22( -,-1(
Cost savin#sIAear 2..... 2 D2,;;; ;.05+ (,-6;
Initial investment......... $ow CD8,0;;? 1.;;; C 8,0;;?
$et present value.......... D1,(;0
14-$! Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
Nse the followin# to answer 7uestions 8(18-:
CI#nore income ta3es in this pro*lem.? @ande<ande Inc. is considerin# the ac7uisition of a
new machine that costs D-5;,;;; and has a useful life of 2 years with no salva#e value. !he
incremental net operatin# income and incremental net cash flows that would *e produced *y
the machine are:
Incremental net operatin# income Incremental net cash flows
Aear 1...... D20,;;; D1(6,;;;
Aear (...... D-1,;;; D1;2,;;;
Aear -...... D2(,;;; D1(+,;;;
Aear 0...... D08,;;; D1(-,;;;
Aear 2...... D06,;;; D1((,;;;
8(. If the discount rate is 1;>, the net present value of the investment is closest to:
A? D-5;,;;;
B? D025,058
C? D(-0,;;;
.? D65,058
Solution:
Initial investment............... $ow CD-5;,;;;? 1.;;; CD-5;,;;;?
Aear 1 incremental net cash
inflow.............................. 1 D1(6,;;; ;.8;8 11+,-2(
Aear ( incremental net cash
inflow.............................. ( D1;2,;;; ;.6(+ 6+,5-;
Aear - incremental net cash
inflow.............................. - D1(+,;;; ;.521 80,+(+
inflow.............................. 0 D1(-,;;; ;.+6- 60,;;8
inflow.............................. 2 D1((,;;; ;.+(1 52,5+(
$et present value................ D 65,058
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-$1
8-. !he pay*ac" period of this investment, rounded off to the nearest tenth of a year, is
closest to:
A? (.8 years
B? 0.8 years
C? -.1 years
.? 2.; years
Solution:
Amount
%emainin#
Balance
Initial investment......... D-5;,;;;
Aear 1 cash inflow........ D1(6,;;; D(0(,;;;
Aear ( cash inflow........ D1;2,;;; D1-5,;;;
Aear - cash inflow........ D1(+,;;; D11,;;;
Aear 0: D11,;;; G D1(-,;;; J ;.1 Crounded to nearest tenth?
CI#nore income ta3es in this pro*lem.? 'riol Inc. is considerin# the ac7uisition of e7uipment
that costs D-+;,;;; and has a useful life of + years with no salva#e value. !he incremental net
cash flows that would *e #enerated *y the e7uipment are:
Incremental net cash flows
Aear 1......... D112,;;;
Aear (......... D1-6,;;;
Aear -......... D82,;;;
Aear 0......... D81,;;;
Aear 2......... D1--,;;;
Aear +......... D1-0,;;;
14-$" Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
80. If the discount rate is 18>, the net present value of the investment is closest to:
A? D-0+,;;;
B? D-86,++5
C? D-6,++5
.? D1(1,601
Solution:
Initial investment............... $ow CD-+;,;;;? 1.;;; CD-+;,;;;?
inflow.............................. 1 D112,;;; ;.60; 8+,+;;
Aear ( incremental net cash
inflow.............................. ( D1-6,;;; ;.5;+ 85,0(6
Aear - incremental net cash
inflow.............................. - D82,;;; ;.28- 2+,--2
inflow.............................. 0 D81,;;; ;.088 02,0;8
inflow.............................. 2 D1--,;;; ;.018 22,5(5
Aear + incremental net cash
inflow.............................. + D1-0,;;; ;.-2( 05,1+6
$et present value................ D-6,++5
82. !he pay*ac" period of this investment is closest to:
A? 0.1 years
B? (.8 years
C? 2.; years
.? -.1 years
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-$#
Solution:
Amount
%emainin#
Balance
Initial investment......... D-+;,;;;
Aear 1 cash inflow........ D112,;;; (02,;;;
Aear ( cash inflow........ 1-6,;;; 1;5,;;;
Aear - cash inflow........ 82,;;; 1(,;;;
Aear 0: D1(,;;; G D81,;;; J ;.1 Crounded to nearest tenth?
Nse the followin# to answer 7uestions 8+186:
CI#nore income ta3es in this pro*lem.? /orrel Nniversity has a small shuttle *us that is in
poor mechanical condition. !he *us can *e either overhauled now or replaced with a new
shuttle *us. !he followin# data have *een #athered concernin# these two alternatives:
resent Bus $ew Bus
urchase cost new.......................... D-(,;;; D0;,;;;
%emainin# net *oo" value............. D(1,;;; T
/a4or repair needed now............... D8,;;; T
Annual cash operatin# costs........... D1(,;;; D6,;;;
Salva#e value now......................... D1;,;;; T
!rade1in value in seven years......... D(,;;; D2,;;;
!he Nniversity could continue to use the present *us for the ne3t seven years. Whether the
present *us is used or a new *us is purchased, the *us would *e traded in for another *us at
the end of seven years. !he Nniversity uses a discount rate of 1(> and the total cost approach
to net present value analysis in evaluatin# its investment decisions.
14-$4 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
8+. If the new *us is purchased, the present value of the annual cash operatin# costs
associated with this alternative is Crounded off to the nearest hundred dollars?:
A? DC20,6;;?
B? DC-+,2;;?
C? DC1+,(;;?
.? DC0(,6;;?
Solution:
Annual cash operatin# costs. 115 CD6,;;;? 0.2+0 CD-+,21(?
85. If the present *us is repaired, the present value of the annual cash operatin# costs
associated with this alternative is Crounded off to the nearest hundred dollars?:
A? DC-+,2;;?
B? DC1+,(;;?
C? DC05,(;;?
.? DC20,6;;?
Solution:
Annual cash operatin# costs 115 CD1(,;;;? 0.2+0 CD20,5+6?
86. If the present *us is repaired, the present value of the salva#e received on sale of the
*us seven years from now is:
A? DC(,(+;?
B? D(,(+;
C? D8;0
.? DC8;0?
Solution:
Salva#e value..................... 5 D(,;;; ;.02( D8;0
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-$$
Nse the followin# to answer 7uestions 8811;;:
CI#nore income ta3es in this pro*lem.? Bec"er Billin# Systems, Inc., has an anti7uated hi#h1
capacity printer that needs to *e up#raded. !he system either can *e overhauled or replaced
with a new system. !he followin# data have *een #athered concernin# these two alternatives:
'verhaul
resent System
urchase $ew
System
urchase cost when new............. D-;;,;;; D0;;,;;;
Accumulated depreciation.......... D((;,;;; T
'verhaul costs needed now........ D(2;,;;; T
Annual cash operatin# costs........ D1(;,;;; D8;,;;;
Salva#e value now...................... D8;,;;; T
Salva#e value in ten years........... D-;,;;; D6;,;;;
Wor"in# capital re7uired............. T D2;,;;;
!he company uses a 1;> discount rate and the total1cost approach to capital *ud#etin#
analysis. !he wor"in# capital re7uired under the new system would *e released for use
elsewhere at the conclusion of the pro4ect. Both alternatives are e3pected to have a useful life
of ten years.
88. !he net present value of the overhaul alternative Crounded to the nearest hundred
dollars? is:
A? DC52;,-;;?
B? DC5(2,6;;?
C? DC852,6;;?
.? DC865,0;;?
Solution:
Annual operatin# costs....... 111; CD1(;,;;;? +.102 CD5-5,0;;?
'verhaul costs.................... $ow CD(2;,;;;? 1.;;; C(2;,;;;?
Salva#e value..................... 1; D-;,;;; ;.-6+ 11,26;
$et present value................ CD852,6(;?
14-$% Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
1;;. !he net present value of the new system alternative Crounded to the nearest hundred
dollars? is:
A? DC6+(,8;;?
B? DC22(,8;;?
C? DC526,0;;?
.? DC865,0;;?
Solution:
Initial investment............... $ow CD0;;,;;;? 1.;;; CD0;;,;;;?
Annual operatin# costs....... 111; CD8;,;;;? +.102 C22-,;2;?
Salva#e valueIold e7uip.... $ow D8;,;;; 1.;;; 8;,;;;
Salva#e value..................... 1; D6;,;;; ;.-6+ -;,66;
Wor"in# capital re7uired.... $ow CD2;,;;;? 1.;;; C2;,;;;?
Wor"in# capital released.... 1; D2;,;;; ;.-6+ 18,-;;
$et present value................ CD6+(,65;?
Nse the followin# to answer 7uestions 1;111;(:
CI#nore income ta3es in this pro*lem.? Almendare< Corporation is considerin# the purchase of
a machine that would cost D-(;,;;; and would last for 5 years. At the end of 5 years, the
machine would have a salva#e value of D21,;;;. By reducin# la*or and other operatin# costs,
the machine would provide annual cost savin#s of D5(,;;;. !he company re7uires a minimum
preta3 return of 16> on all investment pro4ects.
1;1. !he present value of the annual cost savin#s of D5(,;;; is closest to:
A? D((,+;6
B? D650,(86
C? D2;0,;;;
.? D(50,0+0
Solution:
Annual cost savin#s........... 115 D5(,;;; -.61( D(50,0+0
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-$7
1;(. !he net present value of the proposed pro4ect is closest to:
A? 1D(8,2((
B? 1D02,2-+
C? D2,0+0
.? 1D80,;0(
Solution:
Initial investment............... $ow CD-(;,;;;? 1.;;; CD-(;,;;;?
Annual cost savin#s........... 115 D5(,;;; -.61( (50,0+0
Salva#e value..................... 5 D21,;;; ;.-10 1+,;10
$et present value................ CD (8,2((?
Nse the followin# to answer 7uestions 1;-11;0:
CI#nore income ta3es in this pro*lem.? !he mana#ement of 'pray Corporation is considerin#
the purchase of a machine that would cost D-+;,;;;, would last for 5 years, and would have
no salva#e value. !he machine would reduce la*or and other costs *y D56,;;; per year. !he
company re7uires a minimum preta3 return of 11> on all investment pro4ects.
1;-. !he present value of the annual cost savin#s of D56,;;; is closest to:
A? D5+-,;+0
B? D155,;(5
C? D20+,;;;
.? D-+5,2-+
Solution:
Annual la*or savin#s.......... 115 D56,;;; 0.51( D-+5,2-+
14-$8 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
1;0. !he net present value of the proposed pro4ect is closest to:
A? D12,+0+
B? D68,266
C? D5,2-+
.? D16+,;;;
Solution:
Initial investment............... $ow CD-+;,;;;? 1.;;; CD-+;,;;;?
Annual net cash receipts.... 115 D56,;;; 0.51( -+5,2-+
$et present value................ D 5,2-+
Nse the followin# to answer 7uestions 1;211;+:
CI#nore income ta3es in this pro*lem.? ara#as, Inc., is considerin# the purchase of a machine
that would cost D-5;,;;; and would last for 6 years. At the end of 6 years, the machine would
have a salva#e value of D2(,;;;. !he machine would reduce la*or and other costs *y D8+,;;;
per year. Additional wor"in# capital of D0,;;; would *e needed immediately. All of this
wor"in# capital would *e recovered at the end of the life of the machine. !he company
re7uires a minimum preta3 return of 18> on all investment pro4ects.
1;2. !he com*ined present value of the wor"in# capital needed at the *e#innin# of the
pro4ect and the wor"in# capital released at the end of the pro4ect is closest to:
A? 1D-,;;0
B? D;
C? 1D1(,;6;
.? D11,61+
Solution:
Wor"in# capital re7uired.... $ow CD0,;;;? 1.;;; CD0,;;;?
Wor"in# capital released.... 6 D0,;;; ;.(08 88+
$et present value................ CD-,;;0?
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-$
1;+. !he net present value of the proposed pro4ect is closest to:
A? D8,260
B? D56,2-;
C? D((,2-(
.? D18,2(6
Solution:
Initial investment............... $ow CD-5;,;;;? 1.;;; CD-5;,;;;?
Annual la*or savin#s.......... 116 D8+,;;; -.820 -58,260
Wor"in# capital re7uired.... $ow CD0,;;;? 1.;;; C0,;;;?
Wor"in# capital released.... 6 D0,;;; ;.(08 88+
Salva#e value..................... 6 D2(,;;; ;.(08 1(,82;
$et present value................ D 18,2-;
Nse the followin# to answer 7uestions 1;511;6:
CI#nore income ta3es in this pro*lem.? Nndersymin#ton Company has an opportunity to invest
in a machine that would cost D(6,;;;, and that would produce cost savin#s of D6,;;; each
year for the ne3t five years.
1;5. If the machine has <ero salva#e value, then the internal rate of return is closest to:
A? 1;.0>
B? 1;.8>
C? 1(.6>
.? 1-.(>
Solution:
J Investment re7uired G $et annual cash inflow J D(6,;;; G D6,;;; J -.2;;.
!he factor of -.2;; for 2 years represents an internal rate of return of somewhat more
than 1->, or 1-.(>.
14-%! Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
1;6. If the machine=s salva#e value at the end of the pro4ect is D0,;;;, then the internal rate
of return is:
A? less than 11>
B? less than 1(>, *ut #reater than 11>
C? less than 1->, *ut #reater than 1(>
.? #reater than 1->
AICA F$: %eportin# &': ( &evel: )ard
Solution:
Factor of the internal rate of return without considerin# salva#e value
J Investment re7uired G $et annual cash inflow J D(6,;;; G D6,;;; J -.2;;.
!he factor of -.2;; for 2 years represents an internal rate of return of somewhat more
than 1->, or 1-.(>.
Since the I%% is more than 1-> without considerin# the salva#e value, addin# in the
present value of the salva#e value will further increase the I%%.
Nse the followin# to answer 7uestions 1;8111;:
CI#nore income ta3es in this pro*lem.? Ca*e Corporation uses a discount rate of 16> in its
capital *ud#etin#. artial analysis of an investment in automated e7uipment with a useful life
of 5 years has thus far yielded a net present value of 1D122,+;+. !his analysis did not include
any estimates of the intan#i*le *enefits of automatin# this process nor did it include any
estimate of the salva#e value of the e7uipment.
1;8. I#norin# any salva#e value, to the nearest whole dollar how lar#e would the additional
cash flow per year from the intan#i*le *enefits have to *e to ma"e the investment in
the automated e7uipment financially attractiveB
A? D0;,6(;
B? D((,((8
C? D(6,;;8
.? D122,+;+
Solution:
J D122,+;+ G -.61( J D0;,6(;
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-%1
11;. I#norin# any cash flows from intan#i*le *enefits, to the nearest whole dollar how
lar#e would the salva#e value of the automated e7uipment have to *e to ma"e the
investment in the automated e7uipment financially attractiveB
A? D082,2+1
B? D(6,;;8
C? D122,+;+
.? D6+0,056
Solution:
J D122,+;+ G ;.-10 J D082,2+1
Nse the followin# to answer 7uestions 111111(:
CI#nore income ta3es in this pro*lem.? !he mana#ement of )ansley Corporation is
investi#atin# an investment in e7uipment that would have a useful life of 2 years. !he
company uses a discount rate of 16> in its capital *ud#etin#. Food estimates are availa*le for
the initial investment and the annual cash operatin# outflows, *ut not for the annual cash
inflows and the salva#e value of the e7uipment. !he net present value of the initial investment
and the annual cash outflows is 1D(5-,-;;.
111. I#norin# any salva#e value, to the nearest whole dollar how lar#e would the annual
cash inflow have to *e to ma"e the investment in the e7uipment financially attractiveB
A? D20,++;
B? D08,180
C? D65,0;;
.? D(5-,-;;
Solution:
J D(5-,-;; G -.1(5 J D65,0;;
14-%" Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
11(. I#norin# the cash inflows, to the nearest whole dollar how lar#e would the salva#e
value of the e7uipment have to *e to ma"e the investment in the e7uipment financially
attractiveB
A? D+(2,0;;
B? D1,216,---
C? D(5-,-;;
.? D08,180
Solution:
J D(5-,-;; G ;.0-5 J D+(2,0;;
Nse the followin# to answer 7uestions 11-1110:
CI#nore income ta3es in this pro*lem.? &em Corporation is investi#atin# *uyin# a small used
aircraft for the use of its e3ecutives. !he aircraft would have a useful life of 5 years. !he
company uses a discount rate of 11> in its capital *ud#etin#. !he net present value of the
initial investment and the annual operatin# cash cost is 1D-15,8++. /ana#ement is havin#
difficulty estimatin# the annual *enefit of havin# the aircraft and estimatin# the salva#e value
of the aircraft.
11-. I#norin# the annual *enefit, to the nearest whole dollar how lar#e would the salva#e
value of the aircraft have to *e to ma"e the investment in the aircraft financially
attractiveB
A? D(,68;,+;;
B? D-15,8++
C? D-0,85+
.? D+28,+6;
Solution:
J D-15,8++ G ;.06( J D+28,+6;
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-%#
110. I#norin# any salva#e value, to the nearest whole dollar how lar#e would the annual
*enefit have to *e to ma"e the investment in the aircraft financially attractiveB
A? D+5,06;
B? D-15,8++
C? D-0,85+
.? D02,0(0
Solution:
J D-15,8++ G 0.51( J D+5,06;
Nse the followin# to answer 7uestions 112111+:
CI#nore income ta3es in this pro*lem.? ,ddie Corporation is considerin# the followin# three
investment pro4ects:
ro4ect C ro4ect . ro4ect ,
Investment re7uired....................... D-+,;;; D01,;;; D62,;;;
resent value of cash inflows......... D-8,8+; D05,2+; D8(,+2;
112. !he profita*ility inde3 of investment pro4ect . is closest to:
A? ;.1+
B? ;.60
C? ;.10
.? 1.1+
Solution:
ro4ect .
resent value of cash inflows............... 05,2+;
$et present value C*?............................. D +,2+;
ro4ect profita*ility inde3 C*? G Ca?....... ;.1+
14-%4 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
11+. %an" the pro4ects accordin# to the profita*ility inde3, from most profita*le to least
profita*le.
A? ,,C,.
B? ,,.,C
C? .,C,,
.? C,,,.
Solution:
ro4ect C ro4ect . ro4ect ,
Investment re7uired Ca?......................... CD-+,;;;? CD01,;;;? CD62,;;;?
resent value of cash inflows............... -8,8+; 05,2+; 8(,+2;
$et present value C*?............................. D -,8+; D +,2+; D 5,+2;
ro4ect profita*ility inde3 C*? G Ca?....... ;.11 ;.1+ ;.;8
%an"ed *y pro4ect profita*ility inde3... ( 1 -
CI#nore income ta3es in this pro*lem.? !he mana#ement of )i*ert Corporation is considerin#
three investment pro4ects1W, U, and A. ro4ect W would re7uire an investment of D(1,;;;,
ro4ect U of D++,;;;, and ro4ect A of D82,;;;. !he present value of the cash inflows would
*e D((,05; for ro4ect W, D5-,8(; for ro4ect U, and D86,6;; for ro4ect A.
115. !he profita*ility inde3 of investment pro4ect U is closest to:
A? ;.11
B? ;.66
C? 1.1(
.? ;.1(
Solution:
ro4ect U
Investment re7uired Ca?......................... CD++,;;;?
resent value of cash inflows............... 5-,8(;
$et present value C*?............................. D 5,8(;
ro4ect profita*ility inde3 C*? G Ca?....... ;.1(
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-%$
116. %an" the pro4ects accordin# to the profita*ility inde3, from most profita*le to least
profita*le.
A? A,W,U
B? U,A,W
C? U,W,A
.? W,A,U
Solution:
ro4ect W ro4ect U ro4ect A
Investment re7uired Ca?......................... CD(1,;;;? CD++,;;;? CD82,;;;?
resent value of cash inflows............... ((,05; 5-,8(; 86,6;;
$et present value C*?............................. D 1,05; D 5,8(; D -,6;;
ro4ect profita*ility inde3 C*? G Ca?....... ;.;5 ;.1( ;.;0
%an"ed *y pro4ect profita*ility inde3... ( 1 -
Nse the followin# to answer 7uestions 11811(-:
CAppendi3 10C? Fi**oney Inc. has provided the followin# data to *e used in evaluatin# a
Annual cash receipts.......... D++;,;;;
Annual cash e3penses........ D--;,;;;
Salva#e value..................... D66,;;;
!a3 rate............................... -;>
For ta3 purposes, the entire initial investment without any reduction for salva#e value will *e
depreciated over 5 years. !he company uses a discount rate of 1(>.
14-%% Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
118. When computin# the net present value of the pro4ect, what are the annual after1ta3
cash receiptsB
A? D0+(,;;;
B? D-8+,;;;
C? D186,;;;
.? D+8,-;;
Solution:
Annual after1ta3 cash receipts J Annual cash receipts K C1 I !a3 rate?
J D++;,;;; K C1 I ;.-;? J D0+(,;;;
1(;. When computin# the net present value of the pro4ect, what are the annual after1ta3
cash e3pensesB
A? D0(8,;;;
B? D(0(,;;;
C? D88,;;;
.? D(-1,;;;
Solution:
Annual after1ta3 cash e3penses J Annual cash e3penses K C1 I !a3 rate?
J D--;,;;; K C1 I ;.-;?
J D(-1,;;;
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-%7
1(1. When computin# the net present value of the pro4ect, what is the annual amount of the
depreciation ta3 shieldB In other words, *y how much does the depreciation deduction
reduce ta3es each year in which the depreciation deduction is ta"enB
A? D-5,510
B? D66,;;;
C? D55,;;;
.? D--,;;;
Solution:
Initial investment........................ D66;,;;;
&ife in years................................ 5 years
Annual amount of depreciation... D1(2,510
Annual amount of depreciation ta3 shield J D1(2,510 K ;.-;
J D-5,510
1((. When computin# the net present value of the pro4ect, what is the after1ta3 cash flow
from the salva#e value in the final yearB
A? D;
B? D66,;;;
C? D(+,0;;
.? D+1,+;;
Solution:
Fain on sale Casset fully depreciated?..... D66,;;;
K C1 I !a3 rate?........................................ ;.5;
After1ta3 cash flow from salva#e value. . D+1,+;;
14-%8 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
1(-. !he net present value of the pro4ect is closest to:
A? D0+0,+((
B? D0-8,5-+
C? D(8(,080
.? D(+5,+;6
Solution:
J D++;,;;; K C1 I ;.-;? J D0+(,;;;
J D--;,;;; K C1 I ;.-;?
J D(-1,;;;
Initial investment........................ D66;,;;;
Annual amount of depreciation... D1(2,510
Annual amount of depreciation ta3 shield J D1(2,510 K ;.-;
J D-5,510
Initial investment............... $ow CD66;,;;;? 1.;;; CD 66;,;;;?
Annual net cash receipts Cafter1ta3? 116 D0+(,;;; 0.8+6 (,(82,(1+
Annual net cash e3penses Cafter1ta3? 116 CD(-1,;;;? 0.8+6 C1,105,+;6?
Salva#e value Cafter1ta3?.... 6 D+1,+;; ;.0;0 (0,66+
Annual depreciation ta3 shield 115 D-5,510 0.2+0 15(,1(5
$et present value................ D 0+0,+(1
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-%
Nse the followin# to answer 7uestions 1(011(5:
CAppendi3 10C? Shuffle*ar#er Inc. has provided the followin# data to *e used in evaluatin# a
Initial investment............... D(6;,;;;
Annual cash receipts.......... D18+,;;;
&ife of the pro4ect............... + years
Annual cash e3penses........ D56,;;;
Salva#e value..................... D(6,;;;
!he company=s ta3 rate is -;>. For ta3 purposes, the entire initial investment will *e
depreciated over 2 years without any reduction for salva#e value. !he company uses a
discount rate of 1+>.
1(0. When computin# the net present value of the pro4ect, what are the annual after1ta3
cash receiptsB
A? D11(,;;;
B? D1-5,(;;
C? D(8,0;;
.? D26,6;;
Solution:
J D18+,;;; K C1 I ;.-;? J D1-5,(;;
1(2. When computin# the net present value of the pro4ect, what are the annual after1ta3
cash e3pensesB
A? D1;1,0;;
B? D2;,;;;
C? D20,+;;
.? D(-,0;;
Solution:
J D56,;;; K C1 I ;.-;? J D20,+;;
1(+. When computin# the net present value of the pro4ect, what is the annual amount of the
depreciation ta3 shieldB In other words, *y how much does the depreciation deduction
reduce ta3es each year in which the depreciation deduction is ta"enB
A? D1+,6;;
B? D-8,(;;
C? D10,;;;
.? D-(,++5
Solution:
Initial investment........................ D(6;,;;;
Annual amount of depreciation... D2+,;;;
Annual amount of depreciation ta3 shield J D2+,;;; K ;.-;
J D1+,6;;
1(5. When computin# the net present value of the pro4ect, what is the after1ta3 cash flow
A? D(6,;;;
B? D6,0;;
C? D18,+;;
.? D;
Solution:
Fain on sale Casset fully depreciated?..... D(6,;;;
K C1 I !a3 rate?........................................ ;.5;
After1ta3 cash flow from salva#e value. . D18,+;;
Nse the followin# to answer 7uestions 1(611(8:
CAppendi3 10C? @alentin Inc. has provided the followin# data concernin# an investment
pro4ect that has *een proposed:
Annual cash receipts.......... D2-0,;;;
Annual cash e3penses........ D(+5,;;;
Salva#e value..................... D02,;;;
!he company=s ta3 rate is -;>. For ta3 purposes, the entire initial investment will *e
depreciated over - years without any reduction for salva#e value. !he company uses a
discount rate of 1;>.
1(6. When computin# the net present value of the pro4ect, what is the after1ta3 cash flow
A? D1-,2;;
B? D02,;;;
C? D;
.? D-1,2;;
Solution:
K C1 I !a3 rate?........................................ ;.5;
After1ta3 cash flow from salva#e value. . D-1,2;;
1(8. !he net present value of the pro4ect is closest to:
A? D-8,661
B? D28,00(
C? 1D161,0+(
.? 1D1+1,8;1
Solution:
K C1 I !a3 rate?........................................ ;.5;
After1ta3 cash flow from salva#e value. . D-1,2;;
Initial investment.................................... D68;,;;;
.eprecia*le life in years......................... - years
Annual depreciation................................ D(8+,++5
K !a3 rate................................................ ;.-;
Annual depreciation ta3 shield................ D68,;;;
Annual net cash inflows J Annual cash receipts I Annual cash e3penses
J D2-0,;;; I D(+5,;;;
J D(+5,;;;
After1ta3 cash inflows J D(+5,;;; K C1 I ;.-;?
J D16+,8;;
Annual net cash inflows
Cafter1ta3?........................ 112 D16+,8;; -.581 5;6,2-6
.epreciation ta3 shield...... 11- D68,;;; (.065 ((1,-0-
Salva#e value Cafter1ta3?.... 2 D-1,2;; ;.+(1 18,2+(
$et present value................ D 28,00-
Nse the followin# to answer 7uestions 1-;11-1:
CAppendi3 10C? $uno< Inc. is considerin# an investment pro4ect that would re7uire an initial
investment of D(2;,;;; and that would last for 8 years. !he annual cash receipts from the
pro4ect would *e D152,;;; and the annual cash e3penses would *e D58,;;;. !he e7uipment
used in the pro4ect could *e sold at the end of the pro4ect for a salva#e value of D1-,;;;. !he
company=s ta3 rate is -;>. For ta3 purposes, the entire initial investment will *e depreciated
over 5 years without any reduction for salva#e value. !he company uses a discount rate of
1;>.
1-;. When computin# the net present value of the pro4ect, what are the annual after1ta3
cash receiptsB
A? D2(,2;;
B? D1((,2;;
C? D1-8,(6+
.? D8+,;;;
Solution:
J D152,;;; K C1 I ;.-;? J D1((,2;;
1-1. !he net present value of the pro4ect is closest to:
A? D10;,6+-
B? D1-5,;;2
C? D18-,;(;
.? D168,1+(
Solution:
J D152,;;; K C1 I ;.-;? J D1((,2;;
Annual after1ta3 e3penses J Annual e3penses K C1 I !a3 rate?
J D58,;;; K C1 I ;.-;? J D22,-;;
Initial investment.................................... D(2;,;;;
.eprecia*le life in years......................... 5 years
Annual depreciation................................ D-2,510
K !a3 rate................................................ ;.-;
Annual depreciation ta3 shield................ D1;,510
Fain on sale Casset fully depreciated?..... D1-,;;;
K C1 I !a3 rate?........................................ ;.5;
After1ta3 cash flow from salva#e value. . D8,1;;
Initial investment............... $ow CD(2;,;;;? 1.;;; CD(2;,;;;?
Annual cash receipts
Cafter1ta3?........................ 118 D1((,2;; 2.528 5;2,056
Annual cash e3penses
Cafter1ta3?........................ 118 CD22,-;;? 2.528 C-16,05-?
.epreciation ta3 shield 115 D1;,510 0.6+6 2(,12+
Salva#e value..................... 8 D8,1;; ;.0(0 -,626
$et present value................ D18-,;18
Essay Questions
1-(. CI#nore income ta3es in this pro*lem.? Cooney Inc. has provided the followin# data
concernin# a proposed investment pro4ect:
Initial investment............... D1+;,;;;
Annual net cash inflows..... D0;,;;;
Salva#e value..................... D1+,;;;
!he company uses a discount rate of 15>.
%e7uired:
Compute the net present value of the pro4ect.
Ans:
Initial investment............... $ow CD1+;,;;;? 1.;;; CD1+;,;;;?
Annual net cash receipts.... 115 D0;,;;; -.8(( 12+,66;
Salva#e value..................... 5 D1+,;;; ;.--- 2,-(6
$et present value................ D (,(;6
AACSB: Analytic AICA BB: Critical !hin"in# AICA F$: %eportin#
&': 1 &evel: ,asy
1--. CI#nore income ta3es in this pro*lem.? Straus*er# Inc. is considerin# investin# in a
pro4ect that would re7uire an initial investment of D(5;,;;;. !he life of the pro4ect
would *e + years. !he annual net cash inflows from the pro4ect would *e D61,;;;. !he
salva#e value of the assets at the end of the pro4ect would *e D(5,;;;. !he company
uses a discount rate of 1;>.
%e7uired:
Ans:
Annual net cash receipts.... 11+ D61,;;; 0.-22 -2(,522
Salva#e value..................... + D(5,;;; ;.2+0 12,((6
$et present value................ D 85,86-
&': 1 &evel: ,asy
1-0. CI#nore income ta3es in this pro*lem.? !iff Corporation has provided the followin#
data concernin# a proposed investment pro4ect:
Initial investment.................. D8+;,;;;
&ife of the pro4ect.................. + years
Wor"in# capital re7uired....... D(;,;;;
Annual net cash inflows........ D(66,;;;
Salva#e value........................ D100,;;;
!he company uses a discount rate of 1+>. !he wor"in# capital would *e released at
the end of the pro4ect.
%e7uired:
Ans:
Initial investment..................... $ow CD8+;,;;;? 1.;;; CD 8+;,;;;?
Annual net cash inflows........... 11+ D(66,;;; -.+62 1,;+1,(6;
Wor"in# capital invested.......... $ow CD(;,;;;? 1.;;; C(;,;;;?
Wor"in# capital released.......... + D(;,;;; ;.01; 6,(;;
Salva#e value........................... + D100,;;; ;.01; 28,;0;
$et present value...................... D 106,2(;
&': 1 &evel: ,asy
1-2. CI#nore income ta3es in this pro*lem.? /attice Corporation is considerin# investin#
D08;,;;; in a pro4ect. !he life of the pro4ect would *e 5 years. !he pro4ect would
re7uire additional wor"in# capital of D-0,;;;, which would *e released for use
elsewhere at the end of the pro4ect. !he annual net cash inflows would *e D1(-,;;;.
!he salva#e value of the assets used in the pro4ect would *e D08,;;;. !he company
uses a discount rate of 11>.
%e7uired:
Ans:
Annual net cash inflows..... 115 D1(-,;;; 0.51( 258,25+
Wor"in# capital invested.... $ow CD-0,;;;? 1.;;; C-0,;;;?
Wor"in# capital released.... 5 D-0,;;; ;.06( 1+,-66
Salva#e value..................... 5 D08,;;; ;.06( (-,+16
$et present value................ D 82,26(
&': 1 &evel: ,asy
1-+. CI#nore income ta3es in this pro*lem.? Wary Corporation is considerin# the purchase
of a machine that would cost D(0;,;;; and would last for 8 years. At the end of 8
years, the machine would have a salva#e value of D(8,;;;. !he machine would reduce
la*or and other costs *y D+-,;;; per year. !he company re7uires a minimum preta3
return of 18> on all investment pro4ects.
%e7uired:
.etermine the net present value of the pro4ect. Show your wor"V
Ans:
Annual cost savin#s..... 118 D+-,;;; 0.1+- D(+(,(+8
Initial investment......... $ow CD(0;,;;;? 1.;;; C(0;,;;;?
Salva#e value............... 8 D(8,;;; ;.(;8 +,;+1
$et present value.......... D (6,--;
&': 1 &evel: ,asy
1-5. CI#nore income ta3es in this pro*lem.? !he mana#ement of Winion Corporation is
considerin# the purchase of a machine that would cost D15;,;;;, would last for 5
years, and would have no salva#e value. !he machine would reduce la*or and other
costs *y D2;,;;; per year. !he company re7uires a minimum preta3 return of 15> on
all investment pro4ects.
%e7uired:
Ans:
Annual cost savin#s..... 115 D2;,;;; -.8(( D18+,1;;
Initial investment......... $ow CD15;,;;;? 1.;;; C 15;,;;;?
$et present value.......... D (+,1;;
&': 1 &evel: ,asy
1-6. CI#nore income ta3es in this pro*lem.? Xoanette, Inc., is considerin# the purchase of a
machine that would cost D(0;,;;; and would last for 2 years, at the end of which, the
machine would have a salva#e value of D06,;;;. !he machine would reduce la*or and
other costs *y D+(,;;; per year. Additional wor"in# capital of D5,;;; would *e
needed immediately, all of which would *e recovered at the end of 2 years. !he
company re7uires a minimum preta3 return of 15> on all investment pro4ects.
%e7uired:
Ans:
Wor"in# capital needed...... $ow CD5,;;;? 1.;;; C5,;;;?
Annual cost savin#s........... 112 D+(,;;; -.188 186,--6
Wor"in# capital released.... 2 D5,;;; ;.02+ -,18(
Salva#e value..................... 2 D06,;;; ;.02+ (1,666
$et present value................ CD (-,26(?
&': 1 &evel: ,asy
1-8. CI#nore income ta3es in this pro*lem.? !he mana#ement of )arlin# Corporation is
considerin# the purchase of a machine that would cost D8;,2;0 and would have a
useful life of 2 years. !he machine would have no salva#e value. !he machine would
reduce la*or and other operatin# costs *y D(5,;;; per year.
%e7uired:
.etermine the internal rate of return on the investment in the new machine. Show your
wor"V
Ans:
J Investment re7uired G $et annual cash inflow J D8;,2;0 G D(5,;;; J -.-2(
!he factor of -.-2( for 2 years represents an internal rate of return of 12>.
&': ( &evel: ,asy
10;. CI#nore income ta3es in this pro*lem.? /a3cy &imos, Inc., is considerin# the purchase
of a limousine that would cost D165,--2, would have a useful life of 8 years, and
would have no salva#e value. !he limousine would *rin# in cash inflows of D02,;;;
per year in e3cess of its cash operatin# costs.
%e7uired:
.etermine the internal rate of return on the investment in the new limousine. Show
your wor"V
Ans:
J Investment re7uired G $et annual cash inflow J D165,--2 G D02,;;; J 0.1+-
!he factor of 0.1+- for 8 years represents an internal rate of return of 18>.
&': ( &evel: ,asy
101. CI#nore income ta3es in this pro*lem.? !he mana#ement of Eachery Corporation is
considerin# the purchase of a automated moldin# machine that would cost D(;-,(22,
would have a useful life of 2 years, and would have no salva#e value. !he automated
moldin# machine would result in cash savin#s of D+2,;;; per year due to lower la*or
and other costs.
%e7uired:
.etermine the internal rate of return on the investment in the new automated moldin#
machine. Show your wor"V
Ans:
J Investment re7uired G $et annual cash inflow J D(;-,(22 G D+2,;;; J -.1(5
!he factor of -.1(5 for 2 years represents an internal rate of return of 16>.
&': ( &evel: ,asy
10(. CI#nore income ta3es in this pro*lem.? !he mana#ement of an amusement par" is
considerin# purchasin# a new ride for D+;,;;; that would have a useful life of 12
years and a salva#e value of D6,;;;. !he ride would re7uire annual operatin# costs of
D(+,;;; throu#hout its useful life. !he company=s discount rate is 1;>. /ana#ement
is unsure a*out how much additional tic"et revenue the new ride would #enerate1
particularly since customers pay a flat fee when they enter the par" that entitles them
to unlimited rides. )opefully, the presence of the ride would attract new customers.
%e7uired:
)ow much additional revenue would the ride have to #enerate per year to ma"e it an
attractive investmentB
Ans:
Aears Amount 1;>Factor resent @alue
Cost of asset....................... $ow DC+;,;;;? 1.;;; CD +;,;;;?
Annual operatin# costs....... 1112 DC(+,;;;? 5.+;+ C 185,52+?
Salva#e value..................... 12 D6,;;; ;.(-8 1,81(
$et present value................ CD(22,600?
D(22,600 G 5.+;+ J D--,+-5 additional revenue per year would *e necessary to 4ustify
the investment. !his much additional revenue would result in a <ero net present value.
Any less than this and the net present value would *e ne#ative. Any more than this and
the net present value would *e positive.
&': - &evel: )ard
10-. CI#nore income ta3es in this pro*lem.? .evon Corporation uses a discount rate of 6>
in its capital *ud#etin#. artial analysis of an investment in automated e7uipment with
a useful life of 6 years has thus far yielded a net present value of 1D08+,201. !his
analysis did not include any estimates of the intan#i*le *enefits of automatin# this
process nor did it include any estimate of the salva#e value of the e7uipment.
%e7uired:
a. I#norin# any salva#e value, how lar#e would the additional cash flow per year
from the intan#i*le *enefits have to *e to ma"e the investment in the automated
e7uipment financially attractiveB
*. I#norin# any cash flows from intan#i*le *enefits, how lar#e would the salva#e
value of the automated e7uipment have to *e to ma"e the investment in the
automated e7uipment financially attractiveB
Ans:
a. /inimum annual cash flows from the intan#i*le *enefits
J D08+,201 G 2.505 J D6+,0;;
*. /inimum salva#e value
J D08+,201 G ;.20; J D818,2(;
&': - &evel: ,asy
100. CI#nore income ta3es in this pro*lem.? !he mana#ement of Crosson Corporation is
investi#atin# the purchase of a new satellite routin# system with a useful life of 8
years. !he company uses a discount rate of 15> in its capital *ud#etin#. !he net
present value of the investment, e3cludin# its intan#i*le *enefits, is 1D15-,;22.
%e7uired:
)ow lar#e would the additional cash flow per year from the intan#i*le *enefits have to
*e to ma"e the investment in the automated e7uipment financially attractiveB
Ans:
J D15-,;22 G 0.021 J D-6,66;
&': - &evel: ,asy
102. CI#nore income ta3es in this pro*lem.? Chipps Corporation uses a discount rate of 8>
in its capital *ud#etin#. /ana#ement is considerin# an investment in
telecommunications e7uipment with a useful life of 2 years. ,3cludin# the salva#e
value of the e7uipment, the net present value of the investment in the e7uipment is 1
D2-;,862.
%e7uired:
)ow lar#e would the salva#e value of the telecommunications e7uipment have to *e to
ma"e the investment in the telecommunications e7uipment financially attractiveB
Ans:
J D2-;,862 G ;.+2; J D61+,8;;
&': - &evel: ,asy
10+. CI#nore income ta3es in this pro*lem.? Choudhury Corporation is considerin# the
followin# three investment pro4ects:
ro4ect ) ro4ect I ro4ect X
Investment re7uired....................... D11,;;; D2-,;;; D68,;;;
resent value of cash inflows......... D1(,86; D+1,06; D8+,1(;
%e7uired:
%an" the investment pro4ects usin# the pro4ect profita*ility inde3. Show your wor"
Ans:
ro4ect ) ro4ect I ro4ect X
Investment re7uired Ca?......................... CD11,;;;? CD2-,;;;? CD68,;;;?
resent value of cash inflows............... 1(,86; +1,06; 8+,1(;
$et present value C*?............................. D 1,86; D 6,06; D 5,1(;
ro4ect profita*ility inde3 C*? G Ca?....... ;.16 ;.1+ ;.;6
%an"ed *y pro4ect profita*ility inde3... 1 ( -
&': 0 &evel: ,asy
105. CI#nore income ta3es in this pro*lem.? !he mana#ement of Winstead Corporation is
considerin# the followin# three investment pro4ects:
ro4ect M ro4ect % ro4ect S
Investment re7uired....................... D10,;;; D06,;;; D50,;;;
resent value of cash inflows......... D10,10; D20,5(; D6(,10;
!he only cash outflows are the initial investments in the pro4ects.
%e7uired:
%an" the investment pro4ects usin# the pro4ect profita*ility inde3. Show your wor"
Ans:
ro4ect M ro4ect % ro4ect S
Investment re7uired Ca?......................... CD10,;;;? CD06,;;;? CD50,;;;?
resent value of cash inflows............... 10,10; 20,5(; 6(,10;
$et present value C*?............................. D 10; D +,5(; D 6,10;
ro4ect profita*ility inde3 C*? G Ca?....... ;.;1 ;.10 ;.11
%an"ed *y pro4ect profita*ility inde3... - 1 (
&': 0 &evel: ,asy
106. CI#nore income ta3es in this pro*lem.? )ady Company is considerin# purchasin# a
machine that would cost D+66,6;; and have a useful life of 5 years. !he machine
would reduce cash operatin# costs *y D116,528 per year. !he machine would have no
salva#e value.
%e7uired:
a. Compute the pay*ac" period for the machine.
*. Compute the simple rate of return for the machine.
Ans:
a. ay*ac" period J Investment re7uired G $et annual cash flow
J D+66,6;; G D116,528 J 2.6; years
*. !he simple rate of return is computed as follows:
Cost of machine, net of salva#e value Ca?........ D+66,6;;
Nseful life C*?................................................... 5 years
Annual depreciation Ca? G C*?........................... D86,0;;
Annual cost savin#s......................................... D116,528
&ess annual depreciation.................................. 86,0;;
Annual incremental net operatin# income....... D (;,-28
J D(;,-28 G D+66,6;; J (.8+>
&': 2,+ &evel: ,asy
108. CI#nore income ta3es in this pro*lem.? %amson Company is considerin# purchasin# a
machine that would cost D52+,;;; and have a useful life of 6 years. !he machine
would reduce cash operatin# costs *y D1-(,+-( per year. !he machine would have a
salva#e value of D121,(;; at the end of the pro4ect.
%e7uired:
a. Compute the pay*ac" period for the machine.
*. Compute the simple rate of return for the machine.
Ans:
a. ay*ac" period J Investment re7uired G $et annual cash flow
J D52+,;;; G D1-(,+-( J 2.5; years
*. !he simple rate of return is computed as follows:
Cost of machine, net of salva#e value Ca?........... D+;0,6;;
Annual depreciation Ca? G C*?.............................. D52,+;;
Annual cost savin#s............................................ D1-(,+-(
&ess annual depreciation..................................... 52,+;;
Annual incremental net operatin# income.......... D 25,;-(
J D25,;-( G D52+,;;; J 5.20>
&': 2,+ &evel: /edium
12;. CI#nore income ta3es in this pro*lem.? 'stermeyer Corporation is considerin# a
pro4ect that would re7uire an initial investment of D(05,;;; and would last for 5 years.
!he incremental annual revenues and e3penses for each of the 5 years would *e as
follows:
Sales................................... D186,;;;
@aria*le e3penses............... 0+,;;;
Contri*ution mar#in........... 12(,;;;
Fi3ed e3penses:
Salaries............................ ((,;;;
%ents............................... -(,;;;
.epreciation.................... --,;;;
!otal fi3ed e3penses........... 65,;;;
$et operatin# income......... D +2,;;;
At the end of the pro4ect, the scrap value of the pro4ect=s assets would *e D1+,;;;.
%e7uired:
.etermine the pay*ac" period of the pro4ect. Show your wor"V
Ans:
$et operatin# income................................. D+2,;;;
Add noncash deduction for depreciation. . . --,;;;
$et annual cash inflow............................... D86,;;;
ay*ac" period J Investment re7uired G $et annual cash inflow
J D(05,;;; G D86,;;; J (.2( years
&': 2 &evel: ,asy
121. CI#nore income ta3es in this pro*lem.? !he mana#ement of !ruelove Corporation is
considerin# a pro4ect that would re7uire an initial investment of D-(1,;;; and would
last for 5 years. !he annual net operatin# income from the pro4ect would *e D(6,;;;,
includin# depreciation of D0(,;;;. At the end of the pro4ect, the scrap value of the
pro4ect=s assets would *e D(5,;;;.
%e7uired:
.etermine the pay*ac" period of the pro4ect. Show your wor"V
Ans:
$et operatin# income................................. D(6,;;;
Add noncash deduction for depreciation. . . 0(,;;;
$et annual cash inflow............................... D5;,;;;
ay*ac" period J Investment re7uired G $et annual cash inflow
J D-(1,;;; G D5;,;;; J 0.28 years
&': 2 &evel: ,asy
12(. CI#nore income ta3es in this pro*lem.? .ucey Corporation is contemplatin# purchasin#
e7uipment that would increase sales revenues *y D58,;;; per year and cash operatin#
e3penses *y D(5,;;; per year. !he e7uipment would cost D12;,;;; and have a + year
life with no salva#e value. !he annual depreciation would *e D(2,;;;.
%e7uired:
.etermine the simple rate of return on the investment to the nearest tenth of a percent.
Show your wor"V
Ans:
J QIncremental revenues I CCash operatin# e3penses L .epreciation?R G Initial
investment
J58,;;; I CD(5,;;; L D(2,;;;? G D12;,;;;
J (5,;;; G D12;,;;; J 16.;>
&': + &evel: ,asy
12-. CI#nore income ta3es in this pro*lem.? !he mana#ement of $i3on Corporation is
investi#atin# purchasin# e7uipment that would cost D216,;;; and have a 5 year life
with no salva#e value. !he e7uipment would allow an e3pansion of capacity that
would increase sales revenues *y D-+0,;;; per year and cash operatin# e3penses *y
D(11,;;; per year.
%e7uired:
Show your wor"V
Ans:
J QIncremental revenues I CCash operatin# e3penses L .epreciation?R G Initial
investment
J -+0,;;; I CD(11,;;; L D50,;;;? G D216,;;;
J 58,;;; G D216,;;; J 12.->
&': + &evel: ,asy
120. CI#nore income ta3es in this pro*lem.? %ussna" Corporation is investi#atin#
automatin# a process *y purchasin# a new machine for D186,;;; that would have a 8
year useful life and no salva#e value. By automatin# the process, the company would
save D+6,;;; per year in cash operatin# costs. !he company=s current e7uipment
would *e sold for scrap now, yieldin# D16,;;;. !he annual depreciation on the new
machine would *e D((,;;;.
%e7uired:
Show your wor"V
Ans:
J CCost savin#s 1 .epreciation? G Initial investment
J CD+6,;;; I D((,;;;? G CD186,;;; I D16,;;;?
J D0+,;;; G D16;,;;; J (2.+>
&': + &evel: ,asy
14-! Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
122. CI#nore income ta3es in this pro*lem.? !he mana#ement of Schen" Corporation is
investi#atin# automatin# a process *y replacin# old e7uipment *y a new machine. !he
old e7uipment would *e sold for scrap now for D1-,;;;. !he new machine would cost
D+06,;;;, would have a 8 year useful life, and would have no salva#e value. By
automatin# the process, the company would save D16+,;;; per year in cash operatin#
costs.
%e7uired:
Show your wor"V
Ans:
.epreciation on the new machine J D+06,;;; G 8 J D5(,;;;
J CCost savin#s I .epreciation? G Initial investment
J CD16+,;;; I D5(,;;;? G CD+06,;;; 1 D1-,;;;?
J D110,;;; G D+-2,;;; J 16.;>
&': + &evel: ,asy
12+. A company is considerin# purchasin# an asset for D5;,;;; that would have a useful
life of 2 years and would have a salva#e value of D1(,;;;. For ta3 purposes, the entire
ori#inal cost of the asset would *e depreciated over 2 years usin# the strai#ht1line
method and the salva#e value would *e i#nored. !he asset would #enerate annual net
cash inflows of D((,;;; throu#hout its useful life. !he pro4ect would re7uire
additional wor"in# capital of D6,;;;, which would *e released at the end of the
pro4ect. !he company=s ta3 rate is 0;> and its discount rate is 8>.
%e7uired:
What is the net present value of the assetB
Ans:
Aears Amount
!a3
,ffect
Cost of asset........................ $ow CD5;,;;;?
Wor"in# capital needed...... $ow CD6,;;;?
$et annual cash inflows...... 112 D((,;;; ;.+;
.epreciation ta3 shield....... 112 D10,;;; ;.0;
Salva#e value...................... 2 D1(,;;; ;.+;
Wor"in# capital released..... 2 D6,;;;
$et present value................
After1!a3
Cash
Flows
8>
Factor
resent
@alue
Cost of asset........................ CD5;,;;;? 1.;;; CD5;,;;;?
Wor"in# capital needed...... CD6,;;;? 1.;;; C6,;;;?
$et annual cash inflows...... D1-,(;; -.68; 21,-06
.epreciation ta3 shield....... D2,+;; -.68; (1,560
Salva#e value...................... D5,(;; ;.+2; 0,+6;
Wor"in# capital released..... D6,;;; ;.+2; 2,(;;
$et present value................ D 2,;1(
Appendi3: 10C &': 6 &evel: /edium
14-" Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
125. /ana#ement is considerin# purchasin# an asset for D0;,;;; that would have a useful
life of 6 years and no salva#e value. For ta3 purposes, the entire ori#inal cost of the
asset would *e depreciated over 6 years usin# the strai#ht1line method. !he asset
would #enerate annual net cash inflows of D(;,;;; throu#hout its useful life. !he
pro4ect would re7uire additional wor"in# capital of D2,;;;, which would *e released
at the end of the pro4ect. !he company=s ta3 rate is 0;> and its discount rate is 1(>.
%e7uired:
What is the net present value of the assetB
Ans:
Aears Amount
!a3
,ffect
Cost of asset........................ $ow CD0;,;;;?
Wor"in# capital needed....... $ow CD2,;;;?
$et annual cash inflows...... 116 D(;,;;; ;.+;
.epreciation ta3 shield....... 116 D2,;;; ;.0;
Wor"in# capital released..... 6 D2,;;;
$et present value.................
After1!a3
Cash
Flows 1(>Factor
resent
@alue
Cost of asset........................ CD0;,;;;? 1.;;; CD0;,;;;?
Wor"in# capital needed....... CD2,;;;? 1.;;; C2,;;;?
$et annual cash inflows...... D1(,;;; 0.8+6 28,+1+
.epreciation ta3 shield....... D(,;;; 0.8+6 8,8-+
Wor"in# capital released..... D2,;;; ;.0;0 (,;(;
$et present value................. D(+,25(
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-#
126. Bellin# Inc. has provided the followin# data concernin# a proposed investment
pro4ect:
Initial investment............... D1+6,;;;
Annual cash receipts.......... D1(+,;;;
Annual cash e3penses........ D2;,;;;
Salva#e value..................... D6,;;;
!he company=s ta3 rate is -;>. For ta3 purposes, the entire initial investment without
any reduction for salva#e value will *e depreciated over 5 years. !he company uses a
discount rate of 10>.
%e7uired:
Ans:
Annual cash receipts........................................ D1(+,;;;
Annual cash e3penses...................................... 2;,;;;
Annual net cash receipts.................................. D 5+,;;;
Initial investment Ca?........................................ D1+6,;;;
!a3 life C*?........................................................ 5 years
Annual depreciation deduction Ca? G C*?.......... D(0,;;;
AearCs? Amount
!a3
,ffect
After1!a3
Cash Flows
Initial investment........................... $ow CD1+6,;;;? CD1+6,;;;?
Annual net cash receipts................ 118 D5+,;;; ;.5; D2-,(;;
Salva#e value................................. 8 D6,;;; ;.5; D2,+;;
Annual depreciation deductions..... 115 D(0,;;; ;.-; D5,(;;
After1!a3
Cash Flows
10>
Factor @
Initial investment........................... CD1+6,;;;? 1.;;; CD1+6,;;;?
Annual net cash receipts................ D2-,(;; 0.80+ (+-,1(5
Salva#e value................................. D2,+;; ;.-;6 1,5(2
Annual depreciation deductions..... D5,(;; 0.(66 -;,650
$et present value............................ D1(5,5(+
128. Camel Inc. is considerin# a pro4ect that would re7uire an initial investment of
D(1;,;;; and would have a useful life of + years. !he annual cash receipts would *e
D1(+,;;; and the annual cash e3penses would *e D25,;;;. !he salva#e value of the
assets used in the pro4ect would *e D-(,;;;. !he company=s ta3 rate is -;>. For ta3
purposes, the entire initial investment without any reduction for salva#e value will *e
depreciated over 2 years. !he company uses a discount rate of 1;>.
%e7uired:
Ans:
Annual cash receipts........................................ D1(+,;;;
Annual cash e3penses...................................... 25,;;;
Annual net cash receipts.................................. D +8,;;;
Initial investment Ca?........................................ D(1;,;;;
!a3 life C*?........................................................ 2 years
Annual depreciation deduction Ca? G C*?.......... D0(,;;;
AearCs? Amount
!a3
,ffect
After1!a3
Cash Flows
Initial investment........................... $ow CD(1;,;;;? CD(1;,;;;?
Annual net cash receipts................ 11+ D+8,;;; ;.5; D06,-;;
Salva#e value................................. + D-(,;;; ;.5; D((,0;;
Annual depreciation deductions..... 112 D0(,;;; ;.-; D1(,+;;
After1!a3
Cash Flows
1;>
Factor @
Initial investment........................... CD(1;,;;;? 1.;;; CD(1;,;;;?
Annual net cash receipts................ D06,-;; 0.-22 (1;,-05
Salva#e value................................. D((,0;; ;.2+0 1(,+-0
Annual depreciation deductions..... D1(,+;; -.581 05,5+5
$et present value............................ D +;,505
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-$
14-% Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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