The old machine was purchased for $60,000, has an estimated useful life of 10 years with no salvage value, and has annual maintenance costs of $15,000. Determine the annual estimated net income and net cash inflow.Įxercise B Zen Manufacturing Company is considering replacing a four-year-old machine with a new, advanced model. The company uses straight-line depreciation, and has a 40% tax rate.
The equipment is expected to produce $240,000 in cash inflows and $160,000 in cash outflows annually. In just a few words, what would you tell your friend to think about in making this decision?Įxercise A Diane Manufacturing Company is considering investing $600,000 in new equipment with an estimated useful life of 10 years and no salvage value. A friend who knows nothing about the concepts in this chapter is considering purchasing a house for rental to students.What is the purpose of a postaudit? When should a postaudit be performed?.What role does the cost of capital play in the time-adjusted rate of return method and in the net present value method?.What is the time-adjusted rate of return on a capital investment?.What is the profitability index, and of what value is it?.Discuss the limitations of the payback period method.The salesperson attempting to sell the machine says that it will pay for itself in five years. A machine is being considered for purchase.Give an example of an out-of-pocket cost and a sunk cost by describing a situation in which both are encountered.What effect does depreciation have on cash flow?.What effects can capital-budgeting decisions have on a company?.How do capital expenditures differ from ordinary expenditures?.
Short-Answer Questions, Exercises, and Problems
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