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ACCT3502: Why is the NPV Method Preferred for Capital Budgeting - Accounting and Finance Assignment Help

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Instruction: Complete ALL questions from this section. Question 1 Bridgetown Company is considering the acquisition of a piece of equipment with a list price of $850,000. If the equipment is acquired the firm will have to pay $20,000 in delivery charges and $14,000 in installation costs. Acquisition of this equipment will allow the business to expand, resulting in annual net cash flows of $250,000 per year for 5 years. At the end of this period, the machine will be de disposed of at its salvage value of $40,000. To support the increase in production, Bridgetown will require additional working capital of $30,000. The project’s cost of capital is 18% and the tax rate is 25%

A. Compute the after-tax cash flows for the period. (9.5 marks)

B. You have been informed that the net present value is the best basis on which to make a capital investment decision. Use the NPV to advise the company on the acquisition. Your advice should incorporate the cost of capital and the effect of acceptance on the value of the firm. (10.5 marks)

C. Why is the NPV Method preferred for Capital Budgeting and is there any drawback? (Total 20 marks)

Question 2 Canine Treets sells a line of treats for the discerning dog, under the brand name ‘Dogz’. Last year, the firm sold 1,400 packages of treats at $300.00 per package. Variable costs were $100 per dozen and fixed costs amounted to $250,000. Management is anxious to increase sales.

A. Prepare the contribution statement for last year.

B. Compute the company’s breakeven units.

C. Based on the margin of safety, are management’s concerns valid?


D. The market for ‘Dogz’ is relatively small, so the firm has decided to explore other options. If the firm automates the production process, variable costs will decrease by $25 per package, but fixed costs would increase by $15,000. Prepare a contribution statement to show the net income, assuming the sales level remains constant.

E. Based on your results, should the firm undertake the automation project?

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