Below Are Two Potential Investment Alternatives Assume Straight- Line Depreciation in All Computations, and Ignore Income

question 148

Multiple Choice

Below are two potential investment alternatives: $\begin{array}{lll}&A&B\\\text { Initial capital investment } & & \\\$ 180,000 & \$ 270,000 & \\\text { Estimated useful life } & 3 \text { yrs. } & 3 \text { yrs. } \\\text { Estimated terminal salvage value } & -0- & -0- \\\text { Estimated annual savings in cash } & & \\\text { op erating costs } & \$ 75,000 & \$ 120,00 \\\text { Minimum desired rate of return } & 10 \% & 12 \%\end{array}$
Assume straight- line depreciation in all computations, and ignore income taxes. The net present value in investment A is:

• A) $75,000
• B) $6,518
• C) $(123,652)
• D) $186,518

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Definitions:

Qualified Pension Plan

A retirement plan that meets requirements established by the Internal Revenue Code, offering tax advantages such as tax-deferred growth on earnings.

Ordinary Income Rates

Tax rates applicable to an individual's ordinary income, including wages, salaries, commissions, and income from interest or dividends, which are taxed at progressive rates.

Employee Contributions

Employee Contributions are amounts set aside from an individual's earnings into retirement plans, benefit plans, or taxes, often deducted directly from their paycheck.

Tax-deferred Retirement Plans

Savings plans that allow individuals to postpone paying taxes on income invested until it is withdrawn, typically during retirement.