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Applicable financial data is presented below. There will be no salvage value at the end of the investment’s life and,
due to realistic depreciation practices, it is estimated that the salvage value and net book value are equal at the end of
each year. All cash flows are assumed to take place at the end of each year. For investment proposal, Jorelle uses a
12% after-tax target rate of return.
Investment Proposal
Purchase Cost Annual Net After-Tax Annual Net Income
Year and Book Value Cash Flows
0 $250,000 $ 0. $ 0.
1 168,000 120,000 35,000
2 100,000 108,000 39,000
3 50,000 96,000 43,000
4 18,000 84,000 47,000
5 0 72,000 51,000
Questions 86 through 88 are based on the following information. CIA 0593 IV-22 to 24
A company purchased a new machine to stamp the company logo on its products. The cost of the machine was
$250,000, and it has an estimated useful life of 5 years with an expected salvage value at the end of its useful life of
$50,000. The company uses the straight-line depreciation method.
The new machine is expected to save $125,000 annually in operating costs. The company’s tax rate is 40%, and it
uses a 10% discount rate to evaluate capital expenditure.
Year Present Value of $1 Present Value of an Ordinary Annuity of $1
1 .909 .909
2 .826 1.736
3 .751 2.487
4 .683 3.170
5 .621 3.791