Effects of straight-line versus accelerated depreciation on an investment decision Oliver Electronics is considering investing in manufacturing

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Effects of straight-line versus accelerated depreciation on an investment decision Oliver Electronics is considering investing in manufacturing equipment expected to cost $184,000.

The equipment has an estimated useful life of four years and a salvage value of $24,000. It is expected to produce incremental cash revenues of $96,000 per year. Oliver has an effective income tax rate of 30 percent and a desired rate of return of 12 percent.

Required

a. Determine the net present value and the present value index of the investment, assuming that Oliver uses straight-line depreciation for financial and income tax reporting.

b. Determine the net present value and the present value index of the investment, assuming that Oliver uses double-declining-balance depreciation for financial and income tax reporting.

c. Why do the net present values computed in Requirements a and b differ?

d. Determine the payback period and unadjusted rate of return (use average investment), assuming that Oliver uses straight-line depreciation.

e. Determine the payback period and unadjusted rate of return (use average investment), assuming that Oliver uses double-declining-balance depreciation. (Note: Use average annual cash flow when computing the payback period and average annual income when determining the unadjusted rate of return.)

f. Why are there no differences in the payback periods or unadjusted rates of return computed in Requirements d and e?

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Fundamental Managerial Accounting Concepts

ISBN: 9780073526799

4th Edition

Authors: Thomas Edmonds, Bor-Yi Tsay, Philip Olds

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