Capital budgeting
Not what you're looking for?
Roethlis Partners has compiled the following data for a potential venture:
Investment: $20,000; 5-year useful life, with no salvage value;
Annual Sales Revenue = $10,000; Annual Cash Costs = $4,200
Roethlis imposes a required rate of return of 10%. Roethlis faces a 20% tax rate on income, and knows that the tax authorities will only permit straight line depreciation for tax purposes.
a. Is this a project Roethlis would benefit from taking on?
b. Suppose that Roethlis uses straight line depreciation for internal accounting. Demonstrate the conservation property of residual income in this setting, and also show that strict goal congruence is not achieved.
c. For internal purposes alone, suppose that Roethlis switches to a schedule whereby depreciation charges increase over time at a compound rate of 10% (the cost of capital). Compute the depreciation amounts under this plan and show that they lead to strict goal congruence.
(Hints: For internal purposes, let income equal after-tax cash flows (less) depreciation. Note that the proposed depreciation schedule affects the depreciation amounts, net book values and, as a result, the capital charges; however, it has no impact on cash taxes paid, or cash flows in general).
Purchase this Solution
Solution Summary
The problem deals with evaluating a project with capital budgeting techniques.
Education
- B. Sc., University of Nigeria
- M. Sc., London South Bank University
Recent Feedback
- "Thank you."
- "thank you Chidi Ngene.. if you have any APA references would be great"
- "Thank you so much for your help, your explanations were easy to understand and apply!"
- "are you able to highlight the equations used either on the xlsx or a word doc as to how each graph was formed- overall looks fine i just need help understanding this myself"
- "Chidi Ngene, M. Sc. Was extremely helpful as without the help and guidance I would have failed, but with the help I passed. I still have a lot to learn and in need of the guidance to understand and learn more on the subject. I would recommend Chidi Ngene and BrainMass to anyone that are in need of help. Thank you!!"
Purchase this Solution
Free BrainMass Quizzes
SWOT
This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.
MS Word 2010-Tricky Features
These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.
Change and Resistance within Organizations
This quiz intended to help students understand change and resistance in organizations
Basic Social Media Concepts
The quiz will test your knowledge on basic social media concepts.
Learning Lean
This quiz will help you understand the basic concepts of Lean.