P8-1
Classification of expenditures Given the following list of outlays, indicate whether each is normally considered a capital expenditure or an operating expenditure.
Explain your answers.
a. An initial lease payment of $5,000 for electronic point-of-sale cash register systems.
b. An outlay of $20,000 to purchase patent rights from an inventor.
c. An outlay of $80,000 for a major research and development program.
d. An $80,000 investment in a portfolio of marketable securities.
e. A $300 outlay for an office machine.
f. An outlay of $2,000 for a new machine tool.
g. An outlay of $240,000 for a new building.
h. An outlay of $1,000 for a marketing research report.
P9–11
Long-term investment decision, NPV method Jenny Jenks has researched the financial pros and cons of entering into an elite MBA program at her state university. The tuition and needed books for a master’s program will have an upfront cost of $100,000. On average, a person with an MBA degree earns an extra $20,000 per year over a business career of 40 years. Jenny feels that her opportunity cost of capital is 6%. Given her estimates, find the net present value (NPV) of entering this MBA program. Are the benefits of further education worth the associated costs?
P9–20
Payback, NPV, and IRR Rieger International is attempting to evaluate the feasibility of investing $95,000 in a piece of equipment that has a 5-year life. The firm has estimated the cash inflows associated with the proposal as shown in the table at the right. The firm has a 12% cost of capital.
a. Calculate the payback period for the proposed investment.
b. Calculate the net present value (NPV) for the proposed investment.
c. Calculate the internal rate of return (IRR), rounded to the nearest whole percent, for the proposed investment.
d. Evaluate the acceptability of the proposed investment using NPV and IRR. What recommendation would you make relative to implementation of the project? Why?
Year (t) Cash inflows (CFt)
1 $20,000
2 25,000
3 30,000
4 35,000
5 40,000
P11–13
WACC—Book weights Ridge Tool has on its books the amounts and specific
(after-tax) costs shown in the following table for each source of capital.
Source of capital Book value Specific cost
Long-term debt $700,000 5.3%
Preferred stock 50,000 12.0
Common stock equity 650,000 16.0
P11–14
WACC—Book weights and market weights Webster Company has compiled the information shown in the following table.
Source of capital Book value Market value After-tax cost
Long-term debt $4,000,000 $3,840,000 6.0%
Preferred stock 40,000 60,000 13.0
Common stock equity 1,060,000 3,000,000 17.0
Totals $5,100,000 $6,900,000
Please use MS Excel for this assignment