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

question 67

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 3, the tax effect on the sale of the existing asset results in ________. (See Table 11.2)

• A) $8,000 tax liability
• B) $16,000 tax liability
• C) $20,000 tax liability
• D) $23,200 tax liability

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Definitions:

Financial Statements

Financial statements are formal records of the financial activities and position of a business, person, or other entity, typically comprising the balance sheet, income statement, and cash flow statement.

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations with its current assets.

Liquidity

The simplicity of converting an asset or security into cash without impacting its market value.

P/E Ratio

The price-to-earnings ratio, a valuation metric comparing the current share price of a company to its per-share earnings.