Perez Electronics is considering investing in manufacturing

Perez Electronics is considering investing in manufacturing equipment expected to cost $310,000. The equipment has an estimated useful life of four years and a salvage value of $ 18,000. It is expected to produce incremental cash revenues of $155,000 per year. Perez has an effective income tax rate of 40 percent and a desired rate of return of 10 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Required

Determine the net present value and the present value index of the investment, assuming that Perez uses straight-line depreciation for financial and income tax reporting.

Determine the net present value and the present value index of the investment, assuming that Perez uses double-declining-balance depreciation for financial and income tax reporting.

Determine the payback period and unadjusted rate of return (use average investment), assuming that Perez uses straight-line depreciation.

Determine the payback period and unadjusted rate of return (use average investment), assuming that Perez 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.)

Determine the net present value and the present value index of the investment, assuming that Harper uses straight-line depreciation and double-declining-balance for financial and income tax reporting. (Round your answers for \"Net present value\" to the nearest whole dollar amount and your answers for \"Present value index\" to 2 decimal places.)

Determine the payback period and unadjusted rate of return (use average investment), assuming that Harper uses straight-line depreciation and 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.) (Round your answers to 2 decimal places.)

Show less

Solution

Answer 1.)

Answer 2)

1^st Year   -     Straight-line Depreciation Rate = 1 ÷ 4 = 0.25 = 25%
Declining Balance Rate = 2 × 25% = 50%
Depreciation = 50% × $310,000 = $155,000

2^nd Year   Declining Balance Rate = 50%
Book Value = Cost ? Accumulated Depreciation = $310,000 ? $155,000 = $155000
Depreciation = 50% × $155,000 = $77500

^3rd Year   Declining Balance Rate = 50%
Book Value = Cost ? Accumulated Depreciation = $$155,000 ? $77500= $77500
Depreciation = 50% × $77500= $38750

^4th Year   Declining Balance Rate = 50%
Book Value = Cost ? Accumulated Depreciation = $ 77500? $ 38750= $38750
Depreciation = 50% × $38750= $19375

Total payback period 2 years and 6.4 mn.

Answer 4)