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A used concrete pumping truck can be purchased for $125,000. The operation costs are expected to be $65,000 the first year and increase 5% each year thereafter. As a result of the purchase, the company will see an increase in income of $100,000 the first year and 5% more each subsequent year. The company uses straight-line depreciation. The truck will have a useful life of five (5) years and no salvage value. Management would like to see a 10% return on any investment. The company's tax rate is 28%.
Which of the following calculations would not be needed to determine "net income?'
To determine 'net income,' the calculations typically needed include Depreciation, Taxes, and Income Before Taxes. Present Value calculations are typically used in capital budgeting to assess the value of future cash flows today, not directly in the calculation of net income. Net income is determined by subtracting expenses, including depreciation and taxes, from revenues, but present value calculations would not be directly involved in this particular income calculation.
The following question requires your selection of CCC/CCE Scenario 4 (2.7.50.1.1) from the right side of your split screen, using the drop down menu, to reference during your response/choice of responses.
At the end of 30 months, the final price for the piece of equipment will be:
Steel:
Year 1 inflation: 2.5%
Year 2 inflation: 2.5%
Year 3 inflation: 3.0%
Total cumulative inflation for Steel over 2.5 years: CumulativeInflation=(1+0.025)(1+0.025)(1+0.03)=1.0251.0251.03=1.0806251.031.11304\text{Cumulative Inflation} = (1 + 0.025) \times (1 + 0.025) \times (1 + 0.03) = 1.025 \times 1.025 \times 1.03 = 1.080625 \times 1.03 \approx 1.11304CumulativeInflation=(1+0.025)(1+0.025)(1+0.03)=1.0251.0251.03=1.0806251.031.11304
Steel cost component: 0.3 \times $350,000 = $105,000
Adjusted cost: $105,000 \times 1.11304 $116,869.20
Copper:
Year 1 inflation: 1.0%
Year 2 inflation: 1.5%
Year 3 inflation: 2.0%
Total cumulative inflation for Copper over 2.5 years: CumulativeInflation=(1+0.01)(1+0.015)(1+0.02)=1.011.0151.021.045151.021.0651\text{Cumulative Inflation} = (1 + 0.01) \times (1 + 0.015) \times (1 + 0.02) = 1.01 \times 1.015 \times 1.02 1.04515 \times 1.02 1.0651CumulativeInflation=(1+0.01)(1+0.015)(1+0.02)=1.011.0151.021.045151.021.0651
Copper cost component: 0.3 \times $350,000 = $105,000
Adjusted cost: $105,000 \times 1.0651 $111,835.50
Manufacturing Labor:
Year 1 inflation: 2.5%
Year 2 inflation: 3.0%
Year 3 inflation: 3.5%
Total cumulative inflation for Manufacturing Labor over 2.5 years: CumulativeInflation=(1+0.025)(1+0.03)(1+0.035)=1.0251.031.0351.056251.0351.09138\text{Cumulative Inflation} = (1 + 0.025) \times (1 + 0.03) \times (1 + 0.035) = 1.025 \times 1.03 \times 1.035 1.05625 \times 1.035 1.09138CumulativeInflation=(1+0.025)(1+0.03)(1+0.035)=1.0251.031.0351.056251.0351.09138
Labor cost component: 0.4 \times $350,000 = $140,000
Adjusted cost: $140,000 \times 1.09138 $152,793.20
Final Price:
FinalPrice=116,869.20+111,835.50+152,793.20381,497.90\text{Final Price} = 116,869.20 + 111,835.50 + 152,793.20 381,497.90FinalPrice=116,869.20+111,835.50+152,793.20381,497.90
The closest option: Answer: D. $378,750
An agricultural corporation that paid 53% in income tax wanted to build a grain elevator designed to last twenty-five (25) years at a cost of $80,000 with no salvage value. Annual income generated would be $22,500 and annual expenditures were to be $12,000.
Answer the question using a straight line depreciation and a 10% interest rate.
The following question requires your selection of CCC/CCE Scenario 17 (4.2.50.1.1) from the right side of your split screen, using the drop down menu, to reference during your response/choice of responses.
What is the "book value (BV) of the asset at the end of 5 years?
Given Scenario:
You need to calculate the book value (BV) of the asset at the end of 5 years using straight-line depreciation.
The straight-line depreciation formula is: AnnualDepreciation=CostSalvageValueUsefulLife\text{Annual Depreciation} = \frac{\text{Cost} - \text{Salvage Value}}{\text{Useful Life}}AnnualDepreciation=UsefulLifeCostSalvageValue
Initial Cost: $80,000
Salvage Value: $0 (since there's no salvage value)
Useful Life: 25 years
Annual Depreciation: 80,00025=3,200\frac{80,000}{25} = 3,2002580,000=3,200 per year
Book Value after 5 years:
BookValue=Cost(5AnnualDepreciation)=80,000(53,200)=80,00016,000=64,000\text{Book Value} = \text{Cost} - (5 \times \text{Annual Depreciation}) = 80,000 - (5 \times 3,200) = 80,000 - 16,000 = 64,000BookValue=Cost(5AnnualDepreciation)=80,000(53,200)=80,00016,000=64,000
An American company plans to acquire a new press machine from a Dutch manufacturer under the following conditions. One question remaining to be answered is the expected amount of capital recovery when salvage is accounted for.
The following question requires your selection of Scenario 1.4.150 from the right side of your split screen. using the drop down menu, to reference during your response/choice of responses.
Using normally accepted engineering economic practices, what are the two expected methods that should be used to determine the capital recovery costs for the new press?
A)
B)
C)
D)
To calculate the capital recovery costs for the new press machine, which includes the salvage value, the correct method is to use the approach in Option B:
Annual Depreciation: This represents the cost of the equipment spread over its useful life.
Annual Equivalent Interest: This accounts for the interest on the capital cost over time, which is necessary when considering the cost of capital.
Thus, the correct formulas provided in Option B are:
(1) C.R. = annual depreciation + annual equivalent interest
(2) C.R. = P(A/P, i%, N) - F(A/F, i%, N)
These formulas are typically used in engineering economics to assess capital recovery when both depreciation and interest are considered, along with the salvage value. Therefore, the correct answer is B. Option B.
A used concrete pumping truck can be purchased for $125,000. The operation costs are expected to be $65,000 the first year and increase 5% each year thereafter. As a result of the purchase, the company will see an increase in income of $100,000 the first year and 5% more each subsequent year. The company uses straight-line depreciation. The truck will have a useful life of five (5) years and no salvage value. Management would like to see a 10% return on any investment. The company's tax rate is 28%.
Costs which are independent of the system throughout are:
Fixed costs are costs that remain constant regardless of the level of production or business activity. These costs are independent of the system throughout and do not fluctuate with the amount of goods or services produced. In contrast, variable costs change in proportion to the level of production or business activity. Therefore, the correct answer is D. fixed costs.
