Exam 19: Capital Investment

Somozas Manufacturing Company is considering the following investment proposal: The firm uses the straight-line method of depreciation with no mid-year convention. What is the net present value for the investment, assuming no taxes are paid?

The present value of $20,000 to be received five years from now and earning a 6 percent return (rounded) is

Evaristo Corporation is considering an investment in equipment for $45,000. Data related to the investment are as follows: Cash Flow before Year Depreciation and Taxes 1 $30,000 2 30,000 3 30,000 4 30,000 5 30,000 Cost of capital is 18 percent. Evaristo uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 40 percent, and the life of the equipment is five years with no salvage value. What is the payback period in years approximated to two decimal points?

Computation of cash flows is the most critical step in the capital investment process.

A corporation with taxable income of $400,000 and a 40 percent tax rate is considering the sale of an asset. The original cost of the asset is $20,000, with $12,000 of it depreciated. How much total after-tax cash will be produced from the sale of the asset for $24,000?