Review Questions – Chapter 14 Questions 1 - 3 are based on the following information. Tam Co. is negotiating to purchase equipment that would cost $100,000, with the expectation that $20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment’s estimated useful life is 10 years, with no residual value, and would be depreciated by the straight-line method. (Assume that this depreciation rate is used for tax purposes.) Tam’s predetermined minimum desired rate of return is 12%. Present value of an annuity of $1 at 12% for 10 periods is 5.65. Present value of $1 due in 10 periods at 12% is .322. Assume that the tax rate is 20%. 1. The net present value is closest to: A. $4,900 B. $1,700 C. -$5,100 D. $13,000 2. The payback period is closest to: A. 4.5 years B. 5 years C. 5.5 years D. 6.0 years 3. The simple rate of return based on initial investment is A. 20% B. 16% C. 10% D. 8%Questions 4 - 6 are based on the following information. Pam Co. is negotiating to purchase equipment that would cost $100,000, with the expectation that $20,000 per year could be saved in cash costs if the equipment were acquired. The equipment’s estimated useful life is 10 years, with no residual value, and would be depreciated by the straight-line method. (Assume that this depreciation rate is used for tax purposes.) Pam’s predetermined minimum desired rate of return is 12%. Present value of an annuity of $1 at 12% for 10 periods is 5.65. Present value of $1 due in 10 periods at 12% is .322. Assume that the tax rate is 20%. 4. The net present value is closest to: A. $4,900 B. $1,700 C. -$5,100 D. $13,000 5. The payback period is closest to: A. 4.5 years B. 5 years C. 5.5 years D. 6.0 years 6. The simple rate of return based on initial investment is A. 20% B. 16% C. 10% D. 8%Questions 7 - 9 are based on the following information. Mam Co. is negotiating to purchase equipment that would cost $110,000, with the expectation that $20,000 per year could be saved in cash costs if the equipment were acquired. The equipment’s estimated useful life is 10 years, with a $10,000 residual value, and would be depreciated by the straight-line method. (Assume that this depreciation rate is used for tax purposes.) Mam’s predetermined minimum desired rate of return is 12%. Present value of an annuity of $1 at 12% for 10 periods is 5.65. Present value of $1 due in 10 periods at 12% is .322. Assume that the tax rate is 20%. 7. The net present value is closest to: A. $4,900 B. $1,700 C. -$5,100 D. $13,000 8. The payback period is closest to: A. 4.5 years B. 5 years C. 5.5 years D. 6.0 years 9. The simple rate of return based on initial investment is A. 15% B. 13% C. 7% D. 8% 10. Assume that the equipment was being depreciated using MACRS rather than the straight-line method. Assume that this means that the equipment will be fully depreciated when disposed of for its salvage value. What is the cash attributable to the equipment that will be included in the net present value calculation? A. $10,000 B. $8,000 C. $0 D.
View Full Document
Unlocking...