Brandon Company Is Contemplating the Purchase of a New Piece

question 145

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.

The hurdle rate for accepting new capital investment projects is 4%, after-tax. The estimated accounting rate of return (ARR) on this project (rounded to two decimal points) , based on the initial investment is:

• A) 2.67%.
• B) 3.33%.
• C) 6.67%.
• D) 10.00%.
• E) 12.00%.

Understand the principle of hidden production functions in various sectors.

Understand the concept of sustainable growth rate and its calculation.

Calculate and interpret the capacity utilization and the implications for firm growth.

Understand and calculate the retention ratio.

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