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Free CMA Exam Braindumps (page: 73)

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Rex Company is considering an investment in a new plant which will entail an immediate capital expenditure of $4,000,000. The plant is to be depreciated on a straight-line basis over 10 years to zero salvage value. Operating income (before depreciation and taxes) is expected to be $800,000 per year over the 10-year life of the plant. The opportunity cost of capital is 14%. Assume that there are no taxes. What is the NPV for the investment?

  1. $172,800
  2. $(1,913,600)
  3. $520,000
  4. $362,400

Answer(s): A

Explanation:

The NPV is the difference between the present value of the estimated net cash inflows and the present value of the net cash outflows. The present value of the net cash inflows discounted at 14% is $4,172,800 [$800,000(5.216)]. Therefore, the NPV of the investment is $172,800 ($4,172,800 --$4,000,000).



View Related Case Study

Don Adams Breweries is considering an expansion project with an investment of $1 .500000. The equipment will be depreciated to zero salvage value on a straight-line basis over 5 years. The expansion will produce incremental operating revenue of $400,000 annually for 5 years. The company's opportunity cost of capital is 12%. Ignore taxes.What is the NPV of the investment?

  1. $0
  2. $(58,000)
  3. $(116,000)
  4. $1,442,000

Answer(s): B

Explanation:

First, calculate the annual earnings and cash flows:



View Related Case Study

Don Adams Breweries is considering an expansion project with an investment of $1 .500000. The equipment will be depreciated to zero salvage value on a straight-line basis over 5 years. The expansion will produce incremental operating revenue of $400,000 annually for 5 years. The company's opportunity cost of capital is 12%. Ignore taxes. What is the SR of the investment?

  1. 1043%
  2. 12.68%
  3. 16.32%
  4. 19.17%

Answer(s): A

Explanation:

First, calculate the annual earnings and cash flows:


IRR is calculated by trial and error. Calculate the NPV at different discount rates. NPV at 10% = $400,000 (discount factor for 10%, 5years)--$1 500,000 = $400,000(3.791)--$1,500,000 = $16,400
NPV at 11% = $400,000 (3.696)--$1,500,000 =-$21 600
Thus, IRR lies between 10% and 11%. By interpolation, the actual IRR appears to be 10.43%{10 + [16,400 ÷ (16,400 + 21 ,600)}.



View Related Case Study

Don Adams Breweries is considering an expansion project with an investment of $1,500,000. The equipment will be depreciated to zero salvage value on a straight-line basis over 5 years. The expansion will produce incremental operating revenue of $400,000 annually for 5 years. The company's opportunity cost of capital is 12%. Ignore taxes. What is the book (accounting) rate of return of the investment using the average investment method?

  1. 6.67%
  2. 13.33%
  3. 16.67%
  4. 26.67%

Answer(s): B

Explanation:

First, calculate the annual earnings and cash flows:


The average book income is $100,000. The average book value of investment is $750000 [($1,500,000 + 0) + 2]. Thus, the book rate of return is equal to 13.33% ($100,000 + $750,000).






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