Laurel Steel Company decided to spend $160,000 to purchase new state-of-the-art equipment for its manufacturing plant. The equipment has a five-year useful life and a of $40,000. It is expected to generate additional cash revenue of $64,000 per year. Laurel Steel’s required rate of return is 10 percent; its effective income tax rate is 25 percent.
Required
Round financial figures to the nearest whole dollar and other figures to two decimal points. a. Determine the and the present value index of the investment, assuming that Laurel Steel uses straight-line depreciation for financial and income tax reporting.
b. Determine the and the present value index of the investment, assuming that Laurel Steel uses double-declining-balance depreciation for financial and income tax reporting.
c. Why are there differences in the s computed in Requirements a and b?
d. Determine the and unadjusted rate of return (use average investment), assuming that Laurel Steel uses straight-line depreciation.
e. Determine the and unadjusted rate of return (use average investment), assuming that Laurel Steel uses double-declining-balance depreciation. Use average annual cash flow when computing the and average annual income when computing the unadjusted rate of return.
f. Why are there no differences in the or unadjusted rate of return computed in Requirements d and e?
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