Question

Finch Electronics is considering investing in manufacturing equipment expected to cost $260,000. The equipment has an estimated useful life of four years and a salvage value of $ 20,000. It is expected to produce incremental cash revenues of $130,000 per year. Finch has an effective income tax rate of 30 percent and a desired rate of return of 10 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Determine the net present value and the present value index of the investment, assuming that Finch uses straight-line depreciation for financial and income tax reporting. b. Determine the net present value and the present value index of the investment, assuming that Finch uses double-declining-balance depreciation for financial and income tax reporting. d. Determine the payback period and unadjusted rate of return (use average investment), assuming that Finch uses straight-line depreciation. e. Determine the payback period and unadjusted rate of return (use average investment), assuming that Finch uses double-declining- balance depreciation. (Note: Use average annual cash flow when computing the payback period and average annual income when determining the unadjusted rate of return.) Complete this question by entering your answers in the tabs below. Req A and B Reg D and E Determine the net present value and the present value index of the investment, assuming that Harper uses straight-line depreciation and double-declining-balance for financial and income tax reporting. (Round your answers for "Net present value" to the nearest whole dollar amount and your answers for "Present value index" to 2 decimal places.) Net present value Present value index Complete this question by entering your answers in the tabs below. Req A and B Reg D and E Determine the payback period and unadjusted rate of return (use average investment), assuming that Harper uses straight- line depreciation and double-declining-balance depreciation. (Note: Use average annual cash flow when computing the payback period and average annual income when determining the unadjusted rate of return.) (Round your answers to 2 decimal places.) Show less Payback period Unadjusted rate of return years years

Answer 1

ANSWER

Cash flow (in case of SLM)
Incremental cash flow	$130,000
Less: Depreciation (260000-20000)/4	60000
Incremental Income before tax	$70,000
Income tax (30%)	$21,000
Incremental net income	$49,000
Add: Depreciation D	60000
Incremental cash flow	$109,000
a) NPV
Incremental cash flow	109000
PVIFA(10%,4)	3.16987
PV of incremental cash flow A	345516
PV of salvage 20000*.68301 B	13660
Total pV A+B	359176
Less: Initial investment	$260,000
NPV	$99,176
present value index of the investment,
359176/260000	1.38
b)	Year 1	Year 2	Year 3	Year 4
Incremental cash flow	$130,000	$130,000	$130,000	$130,000
Less: depreciation	130000	65000	32500	12500
Incremental Income before tax	$0	$65,000	$97,500	$117,500
Income tax (30%)	$0	$19,500	$29,250	$35,250
Incremental net income	$0	$45,500	$68,250	$82,250
Add: Depreciation D	130000	65000	32500	12500
Incremental cash flow	$130,000	$110,500	$100,750	$94,750
a) NPV
Incremental cash flow	130000	110500	100750	94750	Total
PVIFA(10%,4)	0.9091	0.8264	0.7513	0.6830
PV of incremental cash flow A	118182	91322	75695	64716	349915
Less: Initial investment					-260000
Add: PV of salvage 20000*.68301 B					13660
NPV					103575
present value index of the investment,
(349915+13660)/260000	1.40
DDB rate=1/4*200%	0.5
Year	Beg bal	Dep rate	Dep exp	Acc dep	End bal
1	260000	50%	130000	130000	130000
2	130000	50%	65000	195000	65000
3	65000	50%	32500	227500	32500
4	32500	50%	12500	240000	20000
			(32500*50%)-3750
ans c
Payback period
260000/109000	2.39	years
Rate of return	35.00	%
49000/((260000+20000)/2)*100
ans d
b)	Year 0	Year 1	Year 2	Year 3	Year 4	Total
Incremental cash flow		$130,000	$130,000	$130,000	$130,000
Less: depreciation		130000	65000	32500	12500
Incremental Income before tax		$0	$65,000	$97,500	$117,500
Income tax (30%)		$0	$19,500	$29,250	$35,250
Incremental net income		$0	$45,500	$68,250	$82,250	$196,000
Add: Depreciation D		130000	65000	32500	12500
Incremental cash flow	-260000	$130,000	$110,500	$100,750	$94,750
Cumulative cash flow		($130,000)	($19,500)	$81,250	$176,000
Pay back period
2+(19500/110500)	2.18	years
Unadjusted Rate of return
49000/((260000+20000)/2)*100	35	%
Average income
196000/4	$49,000
***As factor table not given hence upto 5 decimal discount factor is taken

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