Exam 7: Business Decisions, Capital Budgeting and Depreciation

A company buys two machines.Machine A is expected to last 14 years and costs $2450.Machine B is expected to last 10 years and costs $Y.Both machines have a salvage value of $1050 and both use the straight line method of depreciation.At the end of the 9^th year,machine A and machine B have a same book value.What is Y?

You have the opportunity to invest in a project which would require you to pay $50,000 now and another $100,000 in one year,with the promise of a return of $300,000 four years from now.You don't have the cash,but your rich uncle is willing to lend you the money,and would charge you interest at j₁ = 8% for the first 2 years and j₁ = 12% thereafter.What is your net present value (NPV)for this investment?

A machine costing $5000 is estimated to have a useful lifetime of 5 years and a scrap value of $500.It is expected to run for 20,000 hours.You are given that the actual production hours in the first three years are: 5000 in year 1,4400 in year 2,and 4000 in year 3.What is the book value of this machine at the end of three years?

An insurance company has three investments available.Each costing $200,000: (I)A Canadian government bonds to obtain a yield of j₂ = 6%. (II)A perpetuity paying $5900 at the end of each half year. (III)An ordinary annuity paying $13,200 every 6 months for 10 years. Using j₂ = 6% as the cost of capital,rank the above investments from highest net present value to lowest net present value.

A certain machine costs $500,000 new.It has a useful life of 20 years,at the end of which it can be sold for $50,000.Maintenance costs for the machine are anticipated to be $12,000 per year.What is the annual cost of the machine,if money is worth j₁ = 12%?

A piece of equipment costing $50,000 is expected to last 15 years,after which it will have a salvage value of $5000.For the first 3 years,the constant percentage method is used for depreciation with a 20% rate of depreciation.After that,the company switches to the straight line method of depreciation.What is the book value of the equipment 6-years after it was purchased?