Question 10 (2.5 points) Darlington Company is considering investing in an equip
ID: 2470129 • Letter: Q
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Question 10 (2.5 points)
Darlington Company is considering investing in an equipment, which will increase yearly cash revenues by $65000, and yearly cash expenses to operate the equipment by $30,000. The asset will cost $200,000, and will last 8 years, with a salvage value of $40,000. Assuming a tax rate of 39%, determine the net present value of this asset, if the company requires a 10% return on investments.
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Question 11 (2.5 points)
A company uses the net present value methodology in making capital expenditure decisions. In making a decision where they have to choose among two pieces of equipment, which of the following pieces of information will be considered irrelevant
Question 11 options:
Initial cost of each machine
Estimated life of each machine
Salvage value of each machine
Cash flow generated by each machine during the estimated life of the machine
All of the above are relevant
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Question 12 (2.5 points)
Baton Rouge Company is considering purchasing new equipment which will cost $950,000. This equipment is expected to have a useful life of 15 years, have a salvage value of $50,000 and is expected to have an annual net cash inflow (before taxes) of $80,000. Assume the company is in the 34% tax bracket.
What is Baton Rouge's annual net cash inflow (after taxes)?
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Question 13 (2.5 points)
Co. X has gathered the following estimates:
Machine A
Machine B
Cost
$600,000
$600,000
Life
5 yrs
5 yrs
Net Cash Inflow:
Yr 1
$100,000
$500,000
Yr 2
$200,000
$400,000
Yr 3
$300,000
$300,000
Yr 4
$400,000
$200,000
Yr 5
$500,000
$100,000
Co. X uses the net present value method to evaluate capital expenditures. Which of the following two machines has the higher net present value?
Question 13 options:
Machine B
Machine A
They are the same
Cannot be determined from the information provided
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Question 14 (2.5 points)
Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes. During November, they incurred joint processing costs of $420,000. Production and sales value information for November are as follows:
Product
Cases
Selling Price/Case
Additional Costs/Case
Catsup
100,000
$10
$2
Tomato Juice
150,000
$8
$1
Canned Tomatoes
250,000
$12
$3
The joint cost allocated to Canned Tomatoes (using the net realizable value method) is (round to the closest $)
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Question 15 (2.5 points)
Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes. During November, they incurred joint processing costs of $420,000. Production and sales value information for November are as follows:
Product
Cases
Selling Price/Case
Additional Costs/Case
Catsup
100,000
$10
$2
Tomato Juice
150,000
$8
$1
Canned Tomatoes
250,000
$12
$3
Red Sauce Canning Company is considering an option to further refine Catsup. By incurring an additional cost of $60,000, they will be able to increase their selling price of Catsup to $11.20 per case. Determine the incremental advantage (disadvantage) of this option? (round to the closest $)
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Explanation / Answer
Question 10:
Cash inflow = Cash revenue - cash expenses = 65000 - 30000 = $35,000
Annual depritiation = 200000 - 40000 / 8 = $20,000
Net income = 35,000 - 20,000 = $15,000
Tax on income @39% = $5,850
After Tax income = $9,150
Net Cash flow including depritiation = 9,150 + 20,000 = $29,150
PV Annuity of 29,150, N 8, R 10% = 29,150 * 5.3349 = 155,512.34
PV of 40,000, N 8, R 10% = 40,000 * 0.4665 = 18,660
Total PV of Cashinflow = 174,172.34
PV of Cash outflow = 200,000
NPV of Assets = $-25,827.66
Question 11:
All of the above are relevant
Question 12:
Annual depritiation = 950000 - 50000 / 15 = $60,000
Net cash inflow before tax = $80,000
Net income after Depritiation = $20,000
Tax on income @34% = $7,000
After Tax income = $13,000
Net Cash flow (After Tax) = 13,000 + 60,000 = $73,000
Question 13:
required return rate is not given. Assume it is 10%
Present value of cash inflow for machine A
= 100,000 * 0.9091 + 200,000 * 0.8264 + 300,000 * 0.7513 + 400,000 * 0.6830 + 500,000 * 0.6209 - 600,000
= 465,230
Present value of cash inflow for machine B
= 500,000 * 0.9091 + 400,000 * 08264 + 300,000 * 0.7513 + 200,000 * 0.6830 + 100,000 * 0.6209 - 600,000
= 609,190
In Case discounted rate not applied Both machine are Same.
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