Chapter 24: Q10DQ (page 1083)
Google managers must select depreciation methods. Why does the use of the accelerated depreciation method (instead of straight-line) for income tax reporting increase an investment’s value?
The accelerated depreciation lowers the income of businesses in the early years.
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The management of Samsung is planning to invest in a new companywide computerized inventory tracking system. What makes this potential investment risky?
Capital budgeting decisions require careful analysis because they are generally the most and decisions that management faces.
Retsa Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of \(800,000 and will yield the following expected cash flows. Management requires investments to have a payback period of two years, and it requires a 10% return on its investments.
Period Cash Flow
1 . . . . . . . . . . . . \)450,000
2 . . . . . . . . . . . . 400,000
3 . . . . . . . . . . . . 350,000
4 . . . . . . . . . . . . 300,000
Required
1. Determine the payback period for this investment. (Round the answer to one decimal.)
2. Determine the break-even time for this investment. (Round the answer to one decimal.)
3. Determine the net present value for this investment.
Analysis Component
4. Should management invest in this project? Explain.
5. Compare your answers for parts 1 through 4 with those for Problem 24-5B. What are the causes of the differences in results and your conclusions?
Howard Co. is considering two alternative investments. The payback period is 3.5 years for Investment A and 4 years for Investment B.
1. If management relies on the payback period, which investment is preferred?
2. Why might Howard’s analysis of these two alternatives lead to the selection of B over A?
B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost \(360,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 144,000 units of the equipment’s product each year. The expected annual income related to this equipment follows.
Compute the (1) payback period and (2) accounting rate of return for this equipment.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \)225,000
Costs
Materials, labor, and overhead (except depreciation on new equipment) . . . . . . . . . . . . . . . 120,000
Depreciation on new equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,500
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,500
Pretax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,500
Income taxes (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,750
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,750
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