Subject:AccountingPrice:2.84 Bought7

1)Salter Inc. (SI) is reviewing an investment in a new plant and equipment. The plant will be built on vacant land that the company currently owns. SI originally purchased the land for $3,000,000 three years ago, and today, the land could be sold for $4,500,000. SI's income tax rate is 25%.

Which of the following represents the amount that should be included in the net present value (NPV) analysis of this project with respect to the land?

a) $2,812,500

b) $3,000,000

c) $4,125,000

d) $4,312,500

2. Solar Energy Corp. (SEC) is reviewing a possible investment in a new plant for a new product line. The new product is expected to have a life of 10 years, which is the project timeline. SEC has decided to use the NPV method to analyze this project. The new plant will cost $10,000,000 to build and will last 25 years, at which time it will be worth $3,000,000. At the end of 10 years, the building could be sold for $7,500,000. The building qualifies for CCA at the rate of 10%, and there are no disposals of assets in the first year of the project. Assume that there are other assets remaining in the class and that the balance in the CCA account will be positive after the disposal. SEC's income tax rate is 27% and its cost of capital is 12% for this project.

Which of the following represents the net amount included in the project's NPV for the initial investment in the building, net of the present value of its salvage value and tax shields?

a) -$8,450,364

b) -$7,991,098

c) -$6,720,036

d) -$2,258,929

3. A company is considering a new product that will increase its net profits. As part of the payback period analysis of this project, management has estimated the following revenues and costs for the first year:

Year 1

Revenues

$69,000

COGS

51,000

CCA

3,890

Interest expense

4,000

If the company has a tax rate of 25%, which of the following represents the correct amount to be included in the payback period analysis for Year 1?

a) $10,582

b) $11,472

c) $13,500

d) $14,472

4. Which of the following statements is correct with respect to the internal rate of return (IRR) method?

a) The IRR method is useful in comparing mutually exclusive projects.

b) Projects are accepted if the IRR is less than the project's cost of capital.

c) The IRR method assumes cash flows are reinvested at a rate equal to the IRR.

d) Cash flows occurring later in the life of the project are ignored under the IRR method.

5. Which of the following statements is correct with respect to the payback period method?

a) Typically, the time value of money is incorporated.

b) It is a reasonable indicator of liquidity impact.

c) It is not reliable when future cash flows have multiple sign changes.

d) The longer payback period is preferred.

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