Brandon Company Is Contemplating the Purchase of a New Piece

question 114

Multiple Choice

Brandon Company is contemplating the purchase of a new piece of equipment for $45,000. Brandon is in the 30% income tax bracket. Predicted annual after-tax cash inflows from this investment are $18,000, $15,000, $9,000, $6,000 and $3,000 for years 1 through 5, respectively. The firm uses straight-line depreciation with no residual value at the end of five years.

Assume that the hurdle rate for accepting new capital investment projects for the company is 4%, after-tax. (Note: PV $1 factors for 4% are as follows: for year 1 = 0.962, for year 2 = 0.925, for year 3 = 0.889, for year 4 = 0.855, for year 5 = 0.822; the PV annuity factor for 4%, 5 years = 4.452.) At an after-tax discount rate of 4%, the estimated net present value (NPV) of the proposed investment is (rounded to the nearest hundred dollars) :

• A) ($15,000).
• B) ($12,300).
• C) ($9,300).
• D) ($6,000).
• E) $1,800.

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Definitions:

Scenario Analysis

A method of evaluating potential future events through examining different possible scenarios.

Optimistic Situation

A scenario or condition where outcomes are expected to be favorable or the best possible.

Pessimistic Situation

A scenario or outlook where the worst possible outcomes are anticipated, often used in risk management or scenario planning.

Accounting Basis

The method by which revenues and expenses are recorded and recognized in financial statements, such as cash basis or accrual basis.