Investment Decisions

CAPITAL BUDGETING WITH ESTIMATING CASH FLOWS AND INCOME TAXES
Q-1
Wellness Company is trying to choose the best investment project from two alternative projects.
The company has $30,000 to invest. The information about two alternatives is given below:
The discount rate of Wellness Company is 15%.Required:
Give your recommendation to the company in selecting the best project to invest $30,000. Use
a) Payback period b) net present value method c) Profitability index method for your answer d)
ARR if cash inflows equal to profit
Q-2 ABL Pharma Company is considering a new product line to supplement its range line. It is
anticipated that the new product line will involve cash investments of $800,000 at time 0 and $0.5
million in year 1. After-tax cash inflows of $300,000 are expected in year 2, $200,000 in year 3,
$400,000 in year 4, and $400,000 in year 5. the company prefers to be conservative and end all
calculations at that time. If the required rate of return is 12 percent, what is the net present value
and profitability index of the project? Is it acceptable?
Q-3 BOC Pharma Company is considering a new product line to supplement its range line. It is
anticipated that the new product line will involve cash investments of $700,000 at time 0 and $1.0
million in year 1. After-tax cash inflows of $250,000 are expected in year 2, $300,000 in year 3,
$350,000 in year 4, and $400,000 each year thereafter through year 10. Although the product line
might be viable after year 10, the company prefers to be conservative and end all calculations at
that time. If the required rate of return is 15 percent, what is the net present value of the project? Is
it acceptable?
Q-4
The Falcon Company is considering to purchase a printing machine. The relevant information is
given below:
 Cost of the printing machine: $150,000

 Annual cash inflows before tax: $45,000
 Useful life of printing machine: 15 years
 Salvage value (Residual value) after 15-year period: $10,000
 Annual cash expenses: $5,000
Falcon Company uses straight line method of depreciation. Salvage value is not taken into account
for calculating depreciation for tax purposes. Tax rate of Falcon Company is 30%. Company
requires a 14% after-tax return on all investments.
Required: Compute net present value and profitability index of the printing machine.
Q-5
The Falcon Company is considering to purchase a printing machine. The relevant information is
given below:
 Cost of the printing machine: $200,000

 Annual cash inflows before tax: $60,000
 Useful life of printing machine: 10 years
 Salvage value (Residual value) after 10-year period: $10,000
 Annual cash expenses: $10,000
Falcon Company uses straight line method of depreciation. Salvage value is not taken into account
for calculating depreciation for tax purposes. Tax rate of Falcon Company is 20%. Company
requires a 12% after-tax return on all investments.
Required: Compute net present value and profitability index of the printing machine.
Q-6
Chemical Company is considering the replacement of two old machines with a new, more efficient
machine. The old machines could be sold for $70,000 in the secondary market. Their depreciated
book value is $120,000 with a remaining useful and depreciable life of 8 years. Straight-line
depreciation is used on these machines. The new machine can be purchased and installed for
$480,000. It has a useful Me of 8 years, at the end of which a salvage value of $40,000 is expected.
The machine falls into the 5-year property class for accelerated cost recovery
(depreciation)purposes. Due to its greater efficiency, the new machine is expected to result in
incremental annual savings of $120,000. The company's corporate tax rate is 34 percent, and if a
loss occurs in any year on the project it is assumed that the company will receive a tax credit of 34
percent of such loss.
a. What are the incremental cash inflows over the 8 years and what is the incremental cash outflow
at time O?
b. What is the project's net present value if the required rate of return is 14 percent?
Q-7
Textile Company is considering the replacement of two old machines with a new, more efficient
machine. The old machines could be sold for $140,000 in the secondary market. Their depreciated
book value is $240,000 with a remaining useful and depreciable life of 8 years. Straight-line
depreciation is used on these machines. The new machine can be purchased and installed for
$960,000. It has a useful life of 8 years, at the end of which a salvage value of $80,000 is expected.
The machine falls into the 5-year property class for accelerated cost recovery
(depreciation)purposes. Due to its greater efficiency, the new machine is expected to result in
incremental annual savings of $240,000. The company's corporate tax rate is 34 percent, and if a
loss occurs in any year on the project it is assumed that the company will receive a tax credit of 34
percent of such loss.
a. What are the incremental cash inflows over the 8 years and what is the incremental cash outflow
at time O?
b. What is the project's net present value if the required rate of return is 14 percent?

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CAPITAL BUDGETING WITH ESTIMATING CASH FLOWS AND INCOME TAXES

The discount rate of Wellness Company is 15%.Required:

 Cost of the printing machine: $150,000

 Cost of the printing machine: $200,000

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