Which of the following is TRUE? Select one: a. Time value of money should be ignored...

Which of the following is TRUE?
Select one:
a. Time value of money should be ignored in capital budgeting techniques to make accurate decisions.
b. If a firm has limited funds to invest, all the mutually exclusive projects that meet its minimum investment criteria should be implemented.
c. Mutually exclusive projects are projects whose cash flows are unrelated to one another; the acceptance of one does not eliminate the others from further consideration.
d. Independent projects are those whose cash flows are unrelated to one another; the acceptance of one does not eliminate the others from further considerat

Miller Dental, Inc. is considering replacing its existing laser checking system, which was purchased 3 years ago at a cost of $400,000. The laser checking system can be sold for a lump sum of $200,000. It is being depreciated using MACRS and a 5-year recovery period. A new laser checking system will cost $650,000 to purchase and install. Replacement of the planned laser checking system would not involve any change in net working capital. Assuming a 20% tax rate, calculate the initial investment:
Select one:
a. 466,800
b. 416,800
c. 516,800
d. 566,800

Please Solve As soon as
Thank's
Abdul-Rahim Taysir

Solutions

Expert Solution

First eliminate the wrong options

Option a is false because we use discount rate while taking capital budgeting decisions which is nothing but considering time Value of money.

Option b also false because if the firm has limited funds it can not choose all the projects.

Option c is also false because in case of mutually exclusive projects we can only select one project not all.

Option d is TRUE.in case of independent projects we can select all projects that provide positive cash flows.cash flows are unrelated to one another.

Answer is Option d

MACRS Rates for 3 years = 20% , 32% , 19.20%

Balance book value = 400000*(1 - 20% - 32% - 19.20%)

= 115,200

Sale value = 200,000

Profit on sale = 200,000 - 115,200 = 84,800

Tax = 84,800*20% = 16,960

Sale value after tax = 200,000 - 16960 = 183,040

Initial investment = cost - sale value after tax

= 650,000 - 183,040

= 466,800 (approximately).

(Actual amount is 466,960)

Option a is correct.

jeff jeffy answered 1 year ago

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