Arnold Company Is Acquiring a New Machine with a Life

question 5

Multiple Choice

Arnold Company is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: $\begin{array}{lr}\text { Cost of new machine }&\$100,000\\\text { Annual cost savings in cash expenses }&45,000\\\text { Terminal value } & 8,000 \\\text { Maintenance required in the 4th year } & 5,000 \\\text { Book value of the old machine } & 20,000\end{array}$ The new machine would replace an old fully-amortized machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Arnold uses the straight-line method for amortization on all machines (ignore the half-year convention) . Note: some amounts are rounded.
The present value of the total tax savings from the amortization tax shield is:

• A) $21,630.00
• B) $46,432.40
• C) $50,470.00
• D) $19,899.60

Calculate and interpret financial ratios such as times interest earned ratio, equity multiplier, cash coverage ratio, return on equity, profit margin, quick ratio, current ratio, net working capital turnover, and price earnings growth ratio.

Apply the Du Pont Identity Method for analyzing the components affecting a firm's return on equity.

Understand the relationship between financial performance measures such as debt-equity ratio, return on assets, and return on equity.

Determine the impact of inventory turnover and receivables turnover on the firm's operational efficiency.

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Definitions:

Calcium Cycle

A geochemical cycle involving the movement and exchange of calcium among the lithosphere, hydrosphere, biosphere, and atmosphere.

Nutrient Cycling

The process of the movement and exchange of organic and inorganic matter back into the production of living matter.

Wastes

Wastes are substances or materials that are discarded after serving their primary purpose or are considered not useful.

Bacteria

Single-celled, prokaryotic organisms that can be found in various environments, some of which are beneficial while others can cause diseases.