Exam 16: Capital Expenditure Decisions

Raymon Company received $7,000 cash from the sale of a machine that had an $11,000 book value. If the company is subject to a 30% income tax rate, the net cash flow to use in a discounted-cash-flow analysis would be:

The net-present-value method assumes that project funds are reinvested at the:

Mark Industries is currently purchasing part no. 76 from an outside supplier for $80 per unit. Because of supplier reliability problems, the company is considering producing the part internally in an idle manufacturing plant. Annual volume over the next six years is expected to total 300,000 units at variable manufacturing costs of $75 per unit. Mark must acquire $80,000 of new equipment if it reopens the plant. The equipment has a six-year service life, a $14,000 salvage value, and will be depreciated by the straight-line method. Repairs and maintenance are expected to average $5,200 per year in years 4-6, and the equipment will be sold at the end of its life. Required: Rounding to the nearest dollar, use the net-present-value method (total-cost approach) and a 12% hurdle rate to determine whether Mark should make or buy part no. 76. Ignore income taxes.

Preston Company is considering the use of accelerated depreciation rather than straight-line depreciation for a new asset acquisition. Which of the following choices correctly shows when the majority of depreciation would be taken (early or late in the asset's life), when most of the tax savings occur (early or late in the asset's life), and which depreciation method would have the higher present value?