Table 11.2 Computer Disk Duplicators, Inc. Has Been Considering Several Capital Investment

question 58

Multiple Choice

Table 11.2
Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2014. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent.
________________________________________________________ *Not applicable
-For Proposal 2, the tax effect on the sale of the existing asset at the end of the fifth year results in ________. (See Table 11.2)

• A) $12,000 tax liability
• B) $14,560 tax liability
• C) $25,280 tax liability
• D) $16,600 tax liability

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Definitions:

Stock Price

The current market price at which a share of a company's stock can be bought or sold.

Intrinsic Value

The actual, inherent value of an asset, independent of its market price.

Warrants

Financial derivatives that provide the right, but not the obligation, to buy or sell a security at a specific price before a certain date.