LR Investment Corporation is considering investing in one of the following four
ID: 2722176 • Letter: L
Question
LR Investment Corporation is considering investing in one of the following four investment opportunities proposed in the table below.
Data
Alt. A
Alt. B
Alt. C
Alt. D
Initial cost, $
400,000
100,000
500,000
200,000
Annual costs, $
900
12,000
23,000
9,000
Annual benefits, $
101,800
39,700
148,200
55,200
Life, years
5
5
5
5
6% rate of return
Develop the depreciation schedule for the best alternative using the MARCS method.
Data
Alt. A
Alt. B
Alt. C
Alt. D
Initial cost, $
400,000
100,000
500,000
200,000
Annual costs, $
900
12,000
23,000
9,000
Annual benefits, $
101,800
39,700
148,200
55,200
Life, years
5
5
5
5
Explanation / Answer
PV factor for 5 year project at discount rate of 6% = 4.212364 Alt.A Alt.B Alt.C Alt.D Initial cost (a) $4,00,000.00 $1,00,000.00 $5,00,000.00 $2,00,000.00 Annual benefits $1,01,800.00 $39,700.00 $1,48,200.00 $55,200.00 Annual cost $900.00 $12,000.00 $23,000.00 $9,000.00 Net Cash flow $1,00,900.00 $27,700.00 $1,25,200.00 $46,200.00 Present value of net cash flow (Net cash flow * 4.212364) (b) $4,25,027.53 $1,16,682.48 $5,27,387.97 $1,94,611.22 Net present value (a -b) -$25,027.53 -$16,682.48 -$27,387.97 $5,388.78 NPV of alternative D is positive , hence best alternative is Alternative D. Depreciation schedule of Alternative D using MACRS rates for 5 year property Initial Investment $2,00,000.00 Year Depreciation rate Depreciation Accumulated depreciation 1 20.00% $40,000.00 $40,000.00 2 32.00% $64,000.00 $1,04,000.00 3 19.20% $38,400.00 $1,42,400.00 4 11.52% $23,040.00 $1,65,440.00 5 11.52% $23,040.00 $1,88,480.00
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