Computer Disk Duplicators, Inc $\text { "Not applicable }$ -For Proposal 2, the Initial Outlay Equals (See Figure 12

question 2

Multiple Choice

Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate. The firm's cost of capital is 15 percent.
$\begin{array}{llll}&&\text { Proposal }\\\text { Type of Capital } & 1 & 2 & 3 \\\text { Budgeting Decision } & \text { Expansion } & \text { Replacement } & \text { Replacement }\\\hline&& \text { Mut Excl } & \text { Mut Excl } \\\text { Type of Project }&\text { Independent } & \text { with 3 } & \text { with 2 }\\\hline\text { Cost of new asset } & \$ 1,500,000 & \$ 200,000 & \$ 300,000 \\\text { Installation costs } & \$ 0 & \$ 0 & \$ 15,000 \\\text { CCA rate (new asset) } & 10 \% & 20 \% & 20 \%\\\text { Original cost of old asset } & \text { N/A* } & \$ 80,000 & \$ 100,000 \\\text { Purchase date (old asset) } & \text { N/A } & 1 / 1 / 1997 & 1 / 1 / 2000 \\\text { Sale proceeds (old asset) } & \text { N/A } & \$ 50,000 & \$ 120,000 \\\text { CCA rate (old asset) } & \text { N/A } & 20 \% & 20 \%\\\text { Annual net profits before }\\\text { depreciation \& taxes (old) }&N/A&\$30,000&\$25,000\\\text { Annual net profits before }\\\text { depreciation \& taxes (new) }&\$250,000&\$100,000&\$175,000\\\end{array}$
$\text { "Not applicable }$
-For Proposal 2, the initial outlay equals (See Figure 12.3)

• A) $164,560 cash outflow.
• B) $120,720 cash outflow.
• C) $150,000 cash outflow.
• D) $167,520 cash outflow.

---

Definitions:

Fair Value Increments

Adjustments made to the book value of assets and liabilities to reflect their current market value during acquisition accounting.

Depreciable Assets

Assets whose cost is allocated over their useful lives through depreciation, typically tangible assets like machinery, buildings, and equipment.

Amortization

The process of gradually writing off the initial cost of an intangible asset over its useful life.

Amortization Expense

The method of incrementally expensing the original value of an intangible asset throughout its period of utility.