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Stuart Electronics is considering investing in manufacturing equipment expected to cost $350,000. The equipment has an estimated useful life of four years and a salvage value of $22,000. It is expected to produce incremental cash revenues of $175,000 per year. Stuart has an effective income tax rate of 30 percent and a desired rate of return of 12 percent. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Determine the net present value and the present value index of the investment, assuming that Stuart uses straight-line depreciation for financial and income tax reporting. b. Determine the net present value and the present value index of the investment, assuming that Stuart uses double-declining-balance depreciation for financial and income tax reporting. d. Determine the payback period and unadjusted rate of return (use average investment), assuming that Stuart uses straight-line depreciation. e. Determine the payback period and unadjusted rate of return (use average investment); assuming that Stuart uses double-declining- balance depreciation. (Note: Use average annual cash flow when computing the payback period and average annual income when determining the unadjusted rate of return.)

Stuart Electronics is considering investing in manufacturing equipment expected to cost $350,000. The equipment has an estimated useful life of four years and a salvage value of $22,000. It is expected to produce incremental cash revenues of $175,000 per year. Stuart has an effective income tax rate of 30 percent and a desired rate of return of 12 percent. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Determine the net present value and the present value index of the investment, assuming that Stuart uses straight-line depreciation for financial and income tax reporting. b. Determine the net present value and the present value index of the investment, assuming that Stuart uses double-declining-balance depreciation for financial and income tax reporting. d. Determine the payback period and unadjusted rate of return (use average investment), assuming that Stuart uses straight-line depreciation. e. Determine the payback period and unadjusted rate of return (use average investment); assuming that Stuart uses double-declining- balance depreciation. (Note: Use average annual cash flow when computing the payback period and average annual income when determining the unadjusted rate of return.)

Financial Management: Theory & Practice
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 8P: The Rodriguez Company is considering an average-risk investment in a mineral water spring project...
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Stuart Electronics is considering investing in manufacturing equipment expected to cost $350,000. The equipment has an estimated useful life of four years and a salvage value of $22,000. It is expected to produce incremental cash revenues of $175,000 per year. Stuart has an effective income tax rate of 30 percent and a desired rate of return of 12 percent. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Determine the net present value and the present value index of the investment, assuming that Stuart uses straight-line depreciation for financial and income tax reporting. b. Determine the net present value and the present value index of the investment, assuming that Stuart uses double-declining-balance depreciation for financial and income tax reporting. d. Determine the payback period and unadjusted rate of return (use average investment), assuming that Stuart uses straight-line depreciation. e. Determine the payback period and unadjusted rate of return (use average investment); assuming that Stuart uses double-declining- balance depreciation. (Note: Use average annual cash flow when computing the payback period and average annual income when determining the unadjusted rate of return.)
Transcribed Image Text:Stuart Electronics is considering investing in manufacturing equipment expected to cost $350,000. The equipment has an estimated useful life of four years and a salvage value of $22,000. It is expected to produce incremental cash revenues of $175,000 per year. Stuart has an effective income tax rate of 30 percent and a desired rate of return of 12 percent. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Determine the net present value and the present value index of the investment, assuming that Stuart uses straight-line depreciation for financial and income tax reporting. b. Determine the net present value and the present value index of the investment, assuming that Stuart uses double-declining-balance depreciation for financial and income tax reporting. d. Determine the payback period and unadjusted rate of return (use average investment), assuming that Stuart uses straight-line depreciation. e. Determine the payback period and unadjusted rate of return (use average investment); assuming that Stuart uses double-declining- balance depreciation. (Note: Use average annual cash flow when computing the payback period and average annual income when determining the unadjusted rate of return.)
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