Old Machine Sold at a Gain

3
. Regal Industries is replacing a
grinder purchased 5 years ago for
$15,000 with a new one
costing $25,000 cash. The original
grinder is being depreciated on a
straight-line basis over
15 years to a zero salvage value.
Regal will sell this old equipment
to a third party for $6,000
cash. The new equipment will be
depreciated on a straight-line basis
over 10 years to a zero
salvage value. Assuming a 40%
marginal tax rate, Regal’s net cash
investment at the time of
purchase if the old grinder is sold
and the new one is purchased is
a. $19,000 c. $17,400
b. $15,000 d. $25,000 CMA 1292
4-9
4
. A machine that cost $50,000 and
is fully depreciated is sold for
$10,000. The $10,000 is then
used as a down payment on the
purchase of a new machine costing
$75,000. Assuming a
40% tax rate, the out-of-pocket
cost of the new machine is:
A. $75,000 C. $65,000
B. $71,000 D. $69,000 C & U
Old Equipment Sold at a Loss
*. In making a decision to invest in
a project the cash flow should be
adjusted for their tax effect.
Assume an income tax rate of 35%
an old machine with a book value
of P70,000 will be
replaced by a new machine costing
P150,000. The market value of
the old machine is
P50,000. The after tax investment
outlay is (E)
a. P82,500 c. P107,000
b. P93,000 d. P135,000 RPCPA
1085
*. In deciding the investment in a
project, cash flows should be
adjusted for their tax effect.
Assume an income tax rate of
35%. An old equipment with a
book value of P15,000 will be
replaced by a new equipment
costing P50,000. The market
value of the old equipment is
P11,000. The after-tax investment
outlay is (E)
a. P34,400 c. P39,000
b. P37,600 d. P40,400 RPCPA
0581
Old Equipment Sold at a Loss,
Additional Working Capital
*. Diliman Republic Publishers,
Inc. is considering replacing an old
press that cost P800,000 six
years ago with a new one that
would cost P2,250,000. Shipping
and installation would cost an
additional P200,000. The old
press has a book value of P150,000
and could be sold currently
for P50,000. The increased
production of the new press
would increase inventories by
P40,000, accounts receivable by
P160,000 and accounts payable
by P140,000. Diliman
Republic’s net initial investment
for analyzing the acquisition of the
new press assuming a 35%
income tax rate would be (D)
a. P2,450,000 c. P2,600,000
b. P2,425,000 d. P2,250,000
RPCPA 0595
44. Superstrut is considering
replacing an old press that cost
$80,000 six years ago with a new
one that would cost $245,000. The
old press has a net book value of
$15,000 and could be
sold for $5,000. The increased
production of the new press would
require an investment in
additional working capital of
$6,000. The company's tax
rate is 40%. Superstrut's net
investment now in the project
would be: (M)
a. $256,000. c. $250,000.
b. $242,000. d. $245,000. CMA
adapted
Old Machine Sold at a Loss, Cash
Cost Savings on New Machine
5
. A company is considering
replacing existing 2-year-old
equipment. This project will
require a
discounted cash flow analysis to
determine if the benefits exceed
the costs. Year-end data
regarding the existing and new
equipment are shown below.
Existing Equipment New
Equipment
Original cost $600,000 $540,000
Useful life (in years) 5 3
Remaining life (in years) 3 3
Annual depreciation $120,000
$180,000
Accumulated depreciation
$240,000 N/A*
Book value $360,000 N/A*
Current cash disposal value
$100,000 N/A*
* Value is not applicable here.
The new equipment will result in
cash operating cost savings of
$150,000 annually, before
taxes. The new equipment would
be purchased late in the current
year to be operational at the
beginning of the first year of the
project. The existing equipment
would be sold early in the first
year of the project, meaning no
further depreciation would be
taken on it. The company has a
Old Machine Sold at a Gain
3
. Regal Industries is replacing a
grinder purchased 5 years ago for
$15,000 with a new one
costing $25,000 cash. The original
grinder is being depreciated on a
straight-line basis over
15 years to a zero salvage value.
Regal will sell this old equipment
to a third party for $6,000
cash. The new equipment will be
depreciated on a straight-line basis
over 10 years to a zero
salvage value. Assuming a 40%
marginal tax rate, Regal’s net cash
investment at the time of
purchase if the old grinder is sold
and the new one is purchased is
a. $19,000 c. $17,400
b. $15,000 d. $25,000 CMA 1292
4-9
4
. A machine that cost $50,000 and
is fully depreciated is sold for
$10,000. The $10,000 is then
used as a down payment on the
purchase of a new machine costing
$75,000. Assuming a
40% tax rate, the out-of-pocket
cost of the new machine is:
A. $75,000 C. $65,000
B. $71,000 D. $69,000 C & U
Old Equipment Sold at a Loss
*. In making a decision to invest in
a project the cash flow should be
adjusted for their tax effect.
Assume an income tax rate of 35%
an old machine with a book value
of P70,000 will be
replaced by a new machine costing
P150,000. The market value of
the old machine is
P50,000. The after tax investment
outlay is (E)
a. P82,500 c. P107,000
b. P93,000 d. P135,000 RPCPA
1085
*. In deciding the investment in a
project, cash flows should be
adjusted for their tax effect.
Assume an income tax rate of
35%. An old equipment with a
book value of P15,000 will be
replaced by a new equipment
costing P50,000. The market
value of the old equipment is
P11,000. The after-tax investment
outlay is (E)
a. P34,400 c. P39,000
b. P37,600 d. P40,400 RPCPA
0581
Old Equipment Sold at a Loss,
Additional Working Capital
*. Diliman Republic Publishers,
Inc. is considering replacing an old
press that cost P800,000 six
years ago with a new one that
would cost P2,250,000. Shipping
and installation would cost an
additional P200,000. The old
press has a book value of P150,000
and could be sold currently
for P50,000. The increased
production of the new press
would increase inventories by
P40,000, accounts receivable by
P160,000 and accounts payable
by P140,000. Diliman
Republic’s net initial investment
for analyzing the acquisition of the
new press assuming a 35%
income tax rate would be (D)
a. P2,450,000 c. P2,600,000
b. P2,425,000 d. P2,250,000
RPCPA 0595
44. Superstrut is considering
replacing an old press that cost
$80,000 six years ago with a new
one that would cost $245,000. The
old press has a net book value of
$15,000 and could be
sold for $5,000. The increased
production of the new press would
require an investment in
additional working capital of
$6,000. The company's tax
rate is 40%. Superstrut's net
investment now in the project
would be: (M)
a. $256,000. c. $250,000.
b. $242,000. d. $245,000. CMA
adapted
Old Machine Sold at a Loss, Cash
Cost Savings on New Machine
5
. A company is considering
replacing existing 2-year-old
equipment. This project will
require a
discounted cash flow analysis to
determine if the benefits exceed
the costs. Year-end data
regarding the existing and new
equipment are shown below.
Existing Equipment New
Equipment
Original cost $600,000 $540,000
Useful life (in years) 5 3
Remaining life (in years) 3 3
Annual depreciation $120,000
$180,000
Accumulated depreciation
$240,000 N/A*
Book value $360,000 N/A*
Current cash disposal value
$100,000 N/A*
* Value is not applicable here.
The new equipment will result in
cash operating cost savings of
$150,000 annually, before
taxes. The new equipment would
be purchased late in the current
year to be operational at the
beginning of the first year of the
project. The existing equipment
would be sold early in the first
year of the project, meaning no
further depreciation would be
taken on it. The company has a
Even Cash Flow, Salvage Value for Old & New Machine, Working Capital, No PV Table
Questions 94 & 95 are based on the following information. G & N 9e
Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced
with a new system. The following data have been gathered concerning these two alternatives:
Present System Proposed New System
Purchase cost new $250,000 $300,000
Accumulated depreciation $240,000 -
Overhaul costs needed now $230,000 -
Annual cash operating costs $180,000 $170,000
Salvage value now $160,000 -
Salvage value at the end of 8 years $152,000 $165,000
 Working capital required - $200,000
Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both
alternatives are expected to have a useful life of eight years. (Use three decimal places for PV factor)

94. The net present value of the alternative of overhauling the present system is: (D)
a. $(1,279,316). c. $801,284.
b. $(1,119,316). d. $(1,194,036).

95. The net present value of the alternative of purchasing the new system is: (D)
a. $(1,076,495). c. $(1,169,895).
b. $(1,236,495). d. $(969,895).

Uneven Cash Flows, No Present Value Table.

12. What is the net present value of the following cash flow at a discount rate of 15%?
T=0 t=1 t=2
-120,000 -100,000 300,000

A. $19,887 C. $26,300
B. $80,000 D. None of the above B&M

10. What is the net present value of the following cash flows at a discount rate on 12%

t=0 t=1 t=2 t=3

-250,000 100,000 150,000 200,000

A. $101,221 C. $142,208
B. $200,000 D. None of the above B&M

13. Given the following cash flow for project A: C0 = -2000, C1 = +500, C2 = +1500 and C3 = +5000, calculate the
NPV of the project using a 15% discount rate. (E)
A. $5000 C. $3201
B. $2857 D. $2352 B&M

i
. The Seattle Corporation has been presented with an investment opportunity which will yield end-of-year cash
flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10.
This investment will cost the firm $150,000 today, and the firm’s cost of capital is 10 percent. What is the NPV for
this investment? (M)
a. $135,984 d. $ 51,138
b. $ 18,023 e. $ 92,146
 c. $219,045 Brigham

ii
. You are considering the purchase of an investment that would pay you $5,000 per year for Years 1-5, $3,000 per
year for Years 6-8, and $2,000 per year for Years 9 and 10. If you require a 14 percent rate of return, and the
cash flows occur at the end of each year, then how much should you be willing to pay for this investment? (M)
a. $15,819.27 d. $38,000.00
b. $21,937.26 e. $52,815.71
c. $32,415.85 Brigham

8. USSA company has an opportunity to invest in a gold mine. The initial investment is $150 million. The mine is
estimated to produce 80,000 ounces of gold per year for the next ten years. The extraction cost of gold per
ounce is $100 and the expected revenue is at that level. The current price of gold is $300 per ounce and it is
expected to increase by 4% per year for the next 10 years. What is the NPV of the project at a discount rate of
10%? (Ignore taxes.) (D)
A. $-34 million. C. $-27.5 million
B. $40.8 million D. None of the above B&M

iii
. Grant Company is considering an investment of $30,000. Data related to the investment are as follows:

Year Cash Inflows

1 $10,000
2 12,000
3 15,000
4 20,000
5 10,000

Cost of capital is 18 percent.

What is the net present value of the investment, assuming no taxes are paid?
a. $7,000 c. $40,911
b. $10,911 d. $37,000 H&M

iv
. A capital investment project requires an investment of $50,000 and has an expected life of 4 years. Annual cash
flows at the end of each year are expected to be as follows:
Year Amount
1 $20,000
2 24,000
 3 38,000
4 28,000

Ignoring income taxes, the net present value of the project using a 6% discount rate is
a. $44,316 c. $34,148
b. $12,396 d. $(14,148) H&M
v
. The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $950,000. The
investment is expected to generate $350,000 in annual cash flows for a period of four years. The required rate of
return is 14%. The old machine can be sold for $50,000. The machine is expected to have zero value at the end
of the four-year period. What is the net present value of the investment? Would the company want to purchase
the new machine? Income taxes are not considered. (M)
a. $119,550; yes c. $1,019,550; yes
b. $69,550; no d. $326,750; no Horngren
vi
. Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing
machine is operable for three more years and will have a zero disposal price. If the machine is disposed of now,
it may be sold for $60,000. The new machine will cost $200,000 and an additional cash investment in working
capital of $60,000 will be required. The new machine will reduce the average amount of time required to wash
clothing and will decrease labor costs. The investment is expected to net $50,000 in additional cash inflows
during the year of acquisition and $150,000 each additional year of use. The new machine has a three-year life,
and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the
end of each year. Income taxes are not considered in this problem. The working capital investment will not be
recovered at the end of the asset's life.
What is the net present value of the investment, assuming the required rate of return is 10%? Would the
company want to purchase the new machine? (M)
a. $82,000; yes c. $(50,000); yes
b. $50,000; no d. $(82,000); no Horngren
vii
. Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing
machine is operable for three more years and will have a zero disposal price. If the machine is disposed of now,
it may be sold for $60,000. The new machine will cost $200,000 and an additional cash investment in working
capital of $60,000 will be required. The new machine will reduce the average amount of time required to wash
clothing and will decrease labor costs. The investment is expected to net $50,000 in additional cash inflows
during the year of acquisition and $150,000 each additional year of use. The new machine has a three-year life.
These cash flows will generally occur throughout the year and are recognized at the end of each year. Income
taxes are not considered in this problem. The working capital investment will not be recovered at the end of the
asset's life.
What is the net present value of the investment, assuming the required rate of return is 24%? Would the
company want to purchase the new machine? (M)
a. $(32,800); yes c. $16,400; yes
b. $(16,400); no d. $32,800; no Horngren
viii
. Wet and Wild Water Company drills small commercial water wells. The company is in the process of analyzing
the purchase of a new drill. Information on the proposal is provided below.
Initial investment:
Asset $160,000
Working capital $ 32,000
Operations (per year for four years):
Cash receipts $160,000
 Cash expenditures $ 88,000
Disinvestment:
Salvage value of drill (existing) $ 16,000
Discount rate 20%
What is the net present value of the investment? Assume there is no recovery of working capital. (M)
a. $(62,140) c. $42,362
b. $10,336 d. $186,336 Horngren

PAYBACK PERIOD
Initial Investment
*. APJ, Inc. is planning to purchase a new machine that will take six years to recover the cost. The new machine is
expected to produce cash flow from operations, net of income taxes, of P4,500 a year for the first three years of
the payback period and P3,500 a year of the last three years of the payback period. Depreciation of P3,000 a
year shall be charged to income of the six years of the payback period. How much shall the machine cost? (M)
a. P12,000 c. P24,000
b. P18,000 d. none of these RPCPA 1087

92. Louis recently invested in a project that has an expected annual cash inflow of $7,000 for 10 years, and an
expected payback period of 3.6 years. How much did Louis invest in the project?
a. $19,444 c. $25,200
b. $36,000 d. $40,000 Barfield

Minimum Annual Before-tax Operating Cash Savings

ix
. Whatney Company is considering the acquisition of a new, more efficient press. The cost of the press is
$360,000, and the press has an estimated 6-year life with zero salvage value. Whatney uses straight-line
depreciation for both financial reporting and income tax reporting purposes and has a 40% corporate income tax
rate. In evaluating equipment acquisition of this type, Whatney uses a goal of a 4-year payback period. To meet
Whatney’s desired payback period, the press must produce a minimum annual before-tax operating cash
savings of (M)
i

. NPV Answer: d Diff: M

Tabular solution:
NPV = $30,000(PVIFA10%,4) + $35,000(PVIFA10%,5)(PVIF10%,4)
+ $40,000(PVIF10%,10) - $150,000
= $30,000(3.1699) + $35,000(3.7908)(0.6830)
+ $40,000(0.3855) - $150,000 = $51,136.07  $51,136.

Financial calculator solution (in thousands):

Inputs: CF0 = -150; CF1 = 30; Nj = 4; CF2 = 35; Nj = 5; CF3 = 40; I = 10.
Output: NPV = $51.13824 = $51,138.24  $51,138.
ii

. NPV Answer: b Diff: M

Tabular solution:
PV = $5,000(PVIFA14%,5) + $3,000(PVIFA14%,3)(PVIF14%,5)
+ $2,000(PVIFA14%,2)(PVIF14%,8)
= $5,000(3.4331) + $3,000(2.3216)(0.5194) + $2,000(1.6467)(0.3506)
= $17,165.50 + $3,617.52 + $1,154.67 = $21,937.69.

Financial calculator solution (in thousands):

Inputs: CF0 = 0; CF1 = 5; Nj = 5; CF2 = 3; Nj = 3; CF3 = 2; Nj = 2; I = 14.
Output: NPV = 21.93726 = $21,937.26.

Note: Tabular solution differs from calculator solution due to interest factor rounding.
iii
.($10,000 x 0.847) + ($12,000 x 0.718) + ($15,000 x 0.609) + ($20,000 x 0.516) + ($10,000 x 0.437) - $30,000 =
$10,911

iv
.Investment ($50,000)
Present value of cash inflows:
Year 1 ($20,000 x 0.943) 18,860
Year 2 ($24,000 x 0.890) 21,360
Year 3 ($38,000 x 0.840) 31,920
Year 4 ($28,000 x 0.792) 22,176
Net present value $ 44,316
v
.
 Year 0 = ($50,000 - $950,000) = $(900,000)
Year 1 = $350,000 x 0.877 = 306,950
Year 2 = $350,000 x 0.769 = 269,150
Year 3 = $350,000 x 0.675 = 236,250
Year 4 = $350,000 x 0.592 = 207,200
$ 119,550
vi
.
Yr. 0 ($60,000 - $200,000 - $60,000) x 1.000 = $(200,000)
Yr. 1 $50,000 x 0.909 = 45,450
Yr. 2 $150,000 x 0.826 = 123,900
Yr. 3 $150,000 x 0.751 = 112,650
$ 82,000
vii
.
Yr. 0 ($60,000 - $200,000 - $60,000) x 1.000 = $(200,000)
Yr. 1 $ 50,000 x 0.806 = 40,300
Yr. 2 $150,000 x 0.650 = 97,500
Yr. 3 $150,000 x 0.524 = 78,600
$ 16,400
viii
.
- $32,000 - $160,000 + $16,000= $(176,000)
Yr 1 = $72,000 x 0.833= 59,976
Yr 2 = $72,000 x 0.694= 49,968
Yr 3 = $72,000 x 0.579= 41,688
Yr 4 = $72,000 x 0.482= 34,704
$ 10,336
ix
.Answer (B) is correct. Payback is the number of years required to complete the return of the original investment. Given
a periodic constant cash flow, the payback period equals net investment divided by the constant expected periodic after-
tax cash flow. The desired payback period is 4 years, so the constant after-tax annual cash flow must be $90,000
($360,000 ÷ 4). Assuming that the company has sufficient other income to permit realization of the full tax savings,
depreciation of the machine will shield $60,000 ($360,000 ÷ 6) of income from taxation each year, an after-tax cash
savings of $24,000 (40% x $60,000). Thus, the machine must generate an additional $66,000 ($90,000 - $24,000) of
after-tax cash savings from operations. This amount is equivalent to $110,000 [$66,000 ÷ (1.0 - .4)] of before-tax
operating cash savings.
Answer (A) is incorrect because $90,000 is the total desired annual after-tax cash savings. Answer (C) is incorrect
because $114,000 results from adding, not subtracting, the $24,000 of tax depreciation savings to determine the
minimum annual after-tax operating savings. Answer (D) is incorrect because $150,000 assumes that depreciation is not
tax deductible.