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Questions and Answers of Economics

Utilize the CFBT series and AW value to determine whether the equipment investment exceeded the MARR.After 4 years of use, Procter and Gamble has decided to replace capital equipment used on its Zest
Calculate MACRS depreciation and estimate the CFAT series over 4 years. Neglect any tax impact caused by the $700,000 salvage received in year 4.After 4 years of use, Procter and Gamble has decided
Utilize the CFAT series and AW value to determine whether the investment exceeded the MARR.After 4 years of use, Procter and Gamble has decided to replace capital equipment used on its Zest bath soap
Compare the after-tax ROR values using both methods-CFAT series and approximation from the CFBT values using the before-tax ROR and Te.After 4 years of use, Procter and Gamble has decided to replace
A Wal-Mart Distribution Center has put into service forklifts and conveyors purchased for $250,000. Use a spreadsheet to tabulate CFBT, CFAT, NOPAT, and i * before and after taxes for 6 years of
An asset purchased by Stratasys, Inc. had a first cost of $70,000 with an expected salvage value of $10,000 at the end of its 5-year life. In year 2, the revenue was $490,000 with operating expenses
Cheryl, an electrical engineering student who is working on a business minor, is studying depreciation and finance in her engineering management course. The assignment is to demonstrate that shorter
Complete the last four columns of the table below using an effective tax rate of 40% for an asset that has a first cost of $20,000 and a 3-year recovery period with no salvage value, using(a)
Use an effective tax rate of 32% to determine the CFAT and NOPAT associated with the asset shown below under two different scenarios:(a) With depreciation at $6000 per year(b) With depreciation at
J. B. Hunt, Inc., an overland freight company, has purchased new trailers for $150,000 and expects to realize a net $80,000 in gross income over operating expenses for each of the next 3 years. The
A bioengineer is evaluating methods used to apply adhesive onto microporous paper tape that is commonly used after surgery. The machinery costs $200,000, has no salvage value, and the CFBT estimate
An asset with a first cost of $9000 is depreciated by MACRS over a 5-year recovery period. The CFBT is estimated at $10,000 for the first 4 years and $5000 thereafter as long as the asset is
Last month, a company specializing in wind power plant design and construction made a capital investment of $400,000 in physical simulation equipment that will be used for at least 5 years, after
For country 1, SL depreciation is $20,000 per year. Determine the(a) CFAT series(b) PW of depreciation, taxes, and CFAT series.Open Access, Inc. is an international provider of computer network
For country 2, MACRS depreciation for 4 years is $33,333, $44,444, $14,815, and $7407, respectively. Determine the(a) CFAT series(b) PW of depreciation, taxes, and CFAT series.Open Access, Inc. is an
For country 3, DDB depreciation for 5 years is $40,000, $24,000, $14,400, $1600, and 0, respectively. Determine the(a) CFAT series(b) PW of depreciation, taxes, and CFAT series.Open Access, Inc. is
If you worked Problems through, develop a table that summarizes, for each country, the total taxes paid and the PW values of the depreciation, taxes, and CFAT series. For each criterion, select the
An asset with a first cost of $350,000 three years ago is sold for $385,000. The asset was depreciated by the MACRS method and has a book value of $100,800 at the time of sale. Determine the capital
Sun-Tex Truck Stop is located in the desert southwest and is 5 miles from the nearest municipal water system. In order to have fresh water at the site, the company purchased a turnkey reverse osmosis
Freeman Engineering paid $28,500 for specialized equipment for use with its new GPS/GIS system. The equipment was depreciated over a 3-year recovery period using MACRS depreciation. The company sold
Determine any depreciation recapture, capital gain, or capital loss generated by each event described below. Use them to determine the amount of income tax effect, if the effective tax rate is
Sunnen Products Co. of St. Louis, Missouri, makes actuator hones for gas meter tubes where light-duty metal removal is needed. The company purchased land, a building, and two depreciable assets from
Compute the required before-tax return if an after-tax return of 7% per year is expected and the state and local tax rates total 4.2%. The effective federal tax rate is 34%.
Estimate the approximate after-tax rate of return for a project that has a first cost of $500,000, a salvage value of 20% of the first cost after 3 years, and annual gross income less operating
An engineer is making an annual return of 12% before taxes on the retirement investments placed through her employer. No taxes are paid on retirement earnings until they are withdrawn; however, she
Bart is an economic consultant to the textile industry. In both a small business and a large corporation he performed economic evaluations that have an average 18% per year before-tax return. If the
Elias wants to perform an after-tax evaluation of equivalent methods A and B to electro statically remove airborne particulate matter from clean rooms used to package liquid pharmaceutical products.
A corporation uses the following: before-tax MARR of 14% per year, after-tax MARR of 7% per year, and Te of 50%. Two new machines have the following estimates.The machine is retained in use for a
Choose between alternatives A and B below if the after-tax MARR is 8% per year, MACRS depreciation is used, and Te = 40%. The GIâ€“OE estimate is made for only 3 years; it is zero when each
Offshore platform safety equipment, designed for special jobs, will cost $2,500,000, will have no salvage value, and will be kept in service for exactly 5 years, according to company policy.
Automatic inspection equipment purchased for $78,000 by Stimson Engineering generated an average of $26,080 annually in before-tax cash flow during its 5-year estimated life. This represents a return
In a replacement study between a defender and a challenger, there may be a capital gain or loss when the defender asset is sold.(a) How is the gain or loss calculated?(b) How does it affect the AW
An asset that was purchased 2 years ago was expected to be kept in service for its projected life of 5 years, but a new version (the challenger) of this asset promises to be more efficient and have
The defender in a catalytic oxidizer manufacturing plant has a market value of $130,000 and expected annual operating costs of $70,000 with no salvage value after its remaining life of 3 years. The
Perform a PW replacement study (hand and spreadsheet solutions, if instructed) from the information shown using an after-tax MARR = 12% per year, Te = 35%, and a study period of 4 years. (Assume that
After 8 years of use, the heavy truck engine overhaul equipment at Pete's Truck Repair was evaluated for replacement. Pete's accountant used an after-tax MARR of 8% per year, Te = 30%, and a current
Apple Crisp Foods signed a contract some years ago for maintenance services on its fleet of trucks and cars. The contract is up for renewal now for a period of 1 year or 2 years only. The contract
Nuclear safety devices installed several years ago have been depreciated from a first cost of $200,000 to zero using MACRS. The devices can be sold on the used equipment market for an estimated
Three years ago, Silver House Steel purchased a new quenching system for $550,000. The salvage value after 10 years at that time was estimated to be $50,000. Currently the expected remaining life is
Cardenas and Moreno Engineering is evaluating a very large flood control program for several southern U.S. cities. One component is a 4-year project for a special-purpose transport ship-crane for use
Triple Play Innovators Corporation (TPIC) plans to offer IPTV (Internet Protocol TV) service to North American customers starting soon. Perform an AW analysis of the EVA series for the two
Sun Microsystems has developed partnerships with several large manufacturing corporations to use Java software in their consumer and industrial products. A new corporation will be formed to manage
In Denmark, VAT is applied at a rate of 25%, with few exceptions. Vendor A sells raw materials to vendor B for $60,000 plus VAT, vendor B sells a product to vendor C for $130,000 plus VAT, and vendor
What was the average VAT rate paid by Ajinkya in purchasing goods and services?Ajinkya Electronic Systems, a company in India that manufactures many different electronic products, has to purchase
What was the amount of taxes Ajinkya sent to the Treasury of India?Ajinkya Electronic Systems, a company in India that manufactures many different electronic products, has to purchase goods and
What was the total amount of taxes collected by the Treasury of India from Ajinkya and Ajinkyaâ€™s suppliers?Ajinkya Electronic Systems, a company in India that manufactures many different
The after-tax analysis for a $60,000 investment with associated gross income minus expenses (GIâ€“OE) is shown below for the first 2 years only. If the effective tax rate is 40%, the values for
If the after-tax rate of return for a cash flow series is 11.9% and the corporate effective tax rate is 34%, the approximated before-tax rate of return is closest to:(a) 6.8%(b) 5.4%(c) 18.0%(d) 28.7%
An asset purchased for $100,000 with S = $20,000 after 5 years was depreciated using the 5-year MACRS rates. Expenses averaged $18,000 per year, and the effective tax rate is 30%. The asset was
Estimate the approximate after-tax rate of return (ROR) for a project that has a before-tax ROR of 24%. Assume that the company has an effective tax rate of 35% and it uses MACRS depreciation for an
In an after-tax replacement study of cost alternatives involving one challenger and one defender, how will a capital loss when selling the defender affect the AW of each alternative?
While an engineering manager may prefer to use CFAT estimates to evaluate the AW of a project, a financial manager may select AW of EVA estimates. Why are these preferences predictable?
What is the primary difference between a sales tax and a value-added tax?
How much VAT did supplier C collect?Ajinkya Electronic Systems, a company in India that manufactures many different electronic products, has to purchase goods and services from a variety of suppliers
How much tax did Ajinkya keep from the tax it collected based on the purchases it made from supplier A?Ajinkya Electronic Systems, a company in India that manufactures many different electronic
What was the total amount of taxes paid by Ajinkya to the suppliers?Ajinkya Electronic Systems, a company in India that manufactures many different electronic products, has to purchase goods and
Multiple Choice Questions1. A graduated income tax system means:(a) Only taxable incomes above a certain level pay any taxes.(b) A higher fl at rate goes with all of the taxable income.(c) Higher tax
Charles was always a hands-on type of person. Within a couple of years of graduating from college, he started his own business. After some 20 years, it has grown significantly. He owns and operates
Kahn Instruments is considering an investment of $500,000 in a new product line. The company will make the investment only if it will result in a rate of return of 15% per year or higher. If the
A young couple planning ahead for their retirement has decided that $2,600,000 is the amount they will need to retire comfortably 20 years from now. For the past 5 years they have been able to invest
A company that manufactures high-speed submersible rotary indexing spindles is considering upgrading the production equipment to reduce costs over a 6-year planning horizon. The company can invest
Different membrane systems are under consideration for treating 3 million gallons per day (MGD) of cooling tower blowdown water to reduce its volume. Option 1 is a low-pressure seawater reverse
A machine that is currently used in manufacturing circuit board card locks has AW = $-63,000 per year. A possible replacement is under consideration with a first cost of $64,000 and an operating cost
An equipment alternative is being economically evaluated separately by three engineers at Raytheon. The first cost will be $77,000, and the life is estimated at 6 years with a salvage value of
The owner of a small construction company is planning to purchase specialized equipment to complete a contract he just received. The first cost of the equipment is $250,000, and it will likely have a
A company planning to borrow $10.5 million for a plant expansion is not sure what the interest rate will be when it applies for the loan. The rate could be as low as 10% per year or as high as 12%
A company that manufactures clear PVC pipe is investigating the production options of batch and continuous processes. Estimated cash flows are as follows:The chief operating officer (COO) has asked
An engineer collected average cost and revenue data for Arenson’s FC1 handheld financial calculator.Fixed cost = $300,000 per yearCost per unit = $40Revenue per unit = $70(a) What is the range in
Sensitivity to first cost variation: $150,000 to $250,000 (−25% to +25%).A new online patient diagnostics system for surgeons will cost $200,000 to install, cost $5000 annually to maintain and will
Sensitivity to revenue variation: $45,000 to $75,000 (−25% to +25%).A new online patient diagnostics system for surgeons will cost $200,000 to install, cost $5000 annually to maintain and will have
Sensitivity to life variation: 4 years to 7 years (−20% to +40%).A new online patient diagnostics system for surgeons will cost $200,000 to install, cost $5000 annually to maintain and will have an
Plot the results on a graph similar to Figure 18€“3 and comment on the relative sensitivity of each parameter.Sensitivity analysis graph of percent variation from the most likely estimateA
Charlene plans to place an annual savings amount of A = $27,185 into a retirement program at the end of each year for 20 years starting next year. She expects to retire and start to draw a total of R
Ned Thompson Labs performs tests on super alloys, titanium, aluminum, and most metals. Tests on metal composites that rely upon scanning electron microscope results can be subcontracted, or the labs
Titan manufactures and sells gas-powered electricity generators. It can purchase a new line of fuel injectors from either of two companies. Cost and savings estimates are made, but the savings
(a) Graph the sensitivity of what a person should be willing to pay now for a 9%, $10,000 bond due in 10 years if there is a 30% change in (1) face value, (2) dividend rate, or (3) required nominal
DVH Technologies purchases several parts for the instruments it makes via a fixed-price contract of $190,000 per year from a local supplier. The company is considering making the parts in-house
Astor Engineering recently merged with another firm and could lease additional office space or purchase its own building. The $30,000 per year lease agreement will be a net, net, net lease, which
Holly Farms is considering two environmental chambers to accomplish detailed laboratory confirmations of online bacteria tests in chicken meat for the presence of E. coli 0157:H7 and Listeria
When the country's economy is expanding, AB Investment Company is optimistic and expects a MARR of 15% for new investments. However, in a receding economy the expected return is 8%. Normally a 10%
Nationwide income from monthly sales data (rounded to the nearest $100,000) of Stay Flat vacuum hold-down tables for last year is shown below. Determine the expected value of the monthly income, if
There are four estimates made for the anticipated cycle time to produce a subcomponent. The estimates, in seconds, are 10, 20, 30, and 50.(a) If equal weight is placed on each estimate, what is the
The PW value for an alternative is expected to be one of two values based on bids from two vendors. Your office partner told you that the low bid is $3200 per year. If she indicates a chance of 70%
A total of 40 different proposals were evaluated by the IRAD (Industrial Research and Development) committee during the past year. Twenty were funded. Their rate of return estimates are summarized
A very successful health and recreation club wants to construct a mock mountain for climbing and exercise outside for its customers' use. Because of its location, there is a 30% chance of a 120-day
The owner of Ace Roofing may invest $200,000 in new equipment. A life of 6 years and a salvage value of 12% of first cost are anticipated. The annual extra revenue will depend upon the state of the
A flagship hotel in Cedar Falls must construct a retaining wall next to its parking lot due to the widening of the city's main thoroughfare located in front of the hotel. The amount of rainfall
For the decision tree branch shown, determine the expected values of the two outcomes if decision D3 is already selected and the maximum outcome value is sought. (This decision branch is part of a
A large decision tree has an outcome branch detailed (next page). If decisions D1, D2, and D3 are all options in a 1-year period, find the decision path that maximizes the outcome value.There are
Decision D4, which has three possible alternativesâ€”x , y , or z â€”must be made in year 3 of a 6-year study period in order to maximize the expected value of present worth. Using a rate
A total of 5000 mechanical subassemblies are needed annually on a final assembly line. The subassemblies can be obtained in one of three ways: (1) Make them in one of three plants owned by the
The president of ChemTech is trying to decide whether to start a new product line or purchase a small company. It is not financially possible to do both. To make the product for a 3-year period will
A privately held company that makes chips that are essential for high-volume data storage is valued at $3 billion. A computer company that wants to get into cloud computing is considering purchasing
A company that is considering adding a new product line has determined that the first cost would be $80 million. The company is not sure about how the product will be received, so it has projected
Dow Chemical is considering licensing a low liquid discharge (LLD) water treatment system from a small company that developed the process. Dow can purchase a 1-year option for $150,000 that will give
Abby has just negotiated a $15,000 price on a 2-year-old car and is with the salesman closing the deal. There is a 1-year sales warranty with the purchase; however, an extended warranty is available
For annual worth values of $30,000, $40,000, and $50,000 with chances of 20%, 20%, and 60%, respectively, the expected AW is closest to:(a) $34,000(b) $40,000(c) $44,000(d) $48,000
The AW of a 3-year-old machine that is used in the manufacture of modular magnetic encoders, which provide data on the speed and positioning of rotating motor shafts, is $−48,000. A challenger will
A small manufacturing company needs to purchase a machine that will have a first cost of $70,000. The company wants to buy an option that will allow it to purchase the machine for the same price of
Determine the expected net operating income (NOI) from sales of micro turbine components. The probabilities are 20%, 50%, and 30% for revenues of $800,000, $1,000,000, and $1,100,000 per year,

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