Reference no: EM132385668
Question
Net present value, with taxation and intangible benefits
Terang Ltd is considering investing in new production line equipment which will significantly reduce manufacturing costs. The company has identified two options:
· Option A would have a lower initial cost but would require a significant maintenance overhaul after three years.
· Option B would require no maintenance overhaul and have a salvage value at the end of its useful life.
The company's cost of capital is 9% (after tax) and the company tax rate is 30%. Both options A and B are depreciable for tax purposes at 20% per annum on a straight line basis. The following estimates (before tax) relating to the two options have been provided:
Option A Option B
Initial cost $ 90,000 $170,000
Annual cash inflows $180,000 $150,000
Annual cash outflows $140,000 $108,000
Maintenance overhaul (Year 3)* $ 12,000 $ --
Salvage value (non-taxable) $ -- $ 26,000
Estimated useful life 6 years 6 years
* Fully deductible for taxation purposes.
(a) Calculate the net present value and profitability index for each option.
(b) Should an investment be made? If so, is option A or B preferred?
(c) If an investment in new equipment is made, it is expected that this will significantly reduce the risk of injuries to factory employees. How might this be taken account of in the capital budgeting process?
|
Compute the annual payments
: Chancellor Ltd. sells an asset with a $1.3 million fair value to Sophie Inc. Sophie agrees to make six equal payments, each to be paid one year apart.
|
|
Determine the effective interest rate on the bonds
: Determine the effective interest rate on the bonds. Determine the issue price in late 2013 of a single, $1,000 maturity-value bond.
|
|
Research one of the individual income tax change
: Research one of the individual income tax change that was implemented as a result of tax reform. What was the old law, the new law, and what will the potential.
|
|
The applicability of standard costing
: The applicability of standard costing in modern manufacturing environments in volatile environments
|
|
Calculate the net present value and profitability index
: If an investment in new equipment is made, it is expected that this will significantly reduce the risk of injuries to factory employees.
|
|
Design your own data architecture
: Design a model to store data for application - design your own data architecture and properties for the classes, however it should reflect understanding
|
|
MITS4003 Database Systems Assignment Problem
: MITS4003 Database Systems Assignment Help and Solution, Assessment Help - Victorian Institute of Technology, Australia
|
|
Calculate the payback period for the proposed investment
: The straight-line method of depreciation will be applied. It is expected that the equipment will generate net annual cash inflows of $80,000 per year.
|
|
How do games make a valuable contribution to children growth
: How do games make a valuable contribution to children's growth and development? Provide three examples. Why is it important to modify games for elementary.
|