Brandon Company Is Contemplating the Purchase of a New Piece

question 18

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 book (accounting) rate of return 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%.

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Definitions:

Bonds

Fixed-income investment products that represent loans made by an investor to a borrower, typically corporate or governmental, which is obligated to pay back with interest.

Comprehensive Income

The total change in equity for a reporting period other than from transactions with owners, encompassing all revenues, gains, expenses, and losses.

Net Income

The total earnings of a company after subtracting all expenses, taxes, and losses from total revenue.

Retained Earnings

The portion of a company's profits that is kept or retained and saved for future use, reinvestment, or to pay debt.