Herd-behavior arises when investors decide to copy observed decisions of other investors or movements in markets rather than follow their own beliefs and information.
What is Herd-behavior?Individuals acting in unison without a central point of control are said to be acting as a herd. Animals behave in herds, packs, flocks of birds, schools of fish, and other similar groups. Humans also exhibit this behavior. All sorts of human-based herd behavior, including voting, protests, rioting, general strikes, sporting events, religious gatherings, and opinion formation in daily life. An integrated approach to herding was offered by Raafat, Chater, and Frith, who focused on two crucial issues: the ways in which ideas or actions are passed from one person to another and the patterns of connections that exist between them. They argued that combining several herding behavior theories sheds light on how broadly the concept may be used, from economics to cognitive neuroscience.
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If the quantity of an input is variable in the short run, its total cost will as output increases. O A Increase O B Decrease Stay the same O D Rise then fall
If the quantity of an input is variable in the short run, its total cost will as output increases.
What happens to variable costs when output rises in the short term?The marginal cost curve will shift upward because an increase in output necessitates additional labor, which is also more expensive right now. Average total and average variable costs will climb along with the increase in total variable cost.
One element is constant in the short term. As a result, the price of this constant factor does not alter as the amount produced does. When one factor is fixed, the short-run total cost function displays the lowest total cost of manufacturing each amount. Whether or whether the commodity is produced at all, the fixed cost must be covered.
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what is the customer service dimension that refers to a salesperson's desire to work with and properly service customers on a daily basis?
Service standards are rules that staff members must abide by when engaging with clients. Avoid making them excessively severe or inflexible because not all standards will be applicable.
What three aspects of customer service are there?Effectiveness: Customers value your services because you enable them to carry out the task they came for. Customers expect an experience that is simple, straightforward, and free of unnecessary stages. Emotion: Customers leave with the pleased mood they anticipated.
What kinds of customer service are there?Although each channel might be thought of as providing a different kind of customer service, your company can actually only provide proactive and reactive customer service. This article will discuss numerous customer service models, ranging from varied support.
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economists conclude that country a is overheated and the output is about to fall. which of the business cycle phases is referred here? (2 points)
economists conclude that country a is overheated and the output is about to fall. The expansion phase of the business cycle is referred to.
Business CycleBusiness cycles are a sort of variation observed in a country's aggregate economic activity – a cycle that consists of widespread expansions happening at roughly the same time in many economic activities, followed by equally general contractions (recessions).
In essence, business cycles are distinguished by the alternating of expansion and contraction phases in aggregate economic activity, as well as the comovement of economic variables in each phase of the cycle. Not only does real (inflation-adjusted) GDP indicate aggregate economic activity. A recession's severity is determined by the three Ds: depth, diffusion, and duration. The extent of the peak-to-trough decrease in broad indices of output, employment, income, and sales determines the severity of a recession.
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When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects, one would choose
either project if they both are more than managers' maximum payback period.
the project that pays back the soonest if it is equal to or less than managers' maximum payback period.
the project that pays back the soonest.
neither project if they both are less than managers' maximum payback period.
If the project's maximum payback period is equal to or less than that of the managers, it will be the one that pays off the quickest.
What precisely does a lengthy payback period involve?The time frame required for an investor to achieve break-even or recover their investment's cost is known as the payback period. The investment appeal of longer repayment terms is lower than that of shorter ones.
How does the payback period rule work?The Payback Period indicates how long it takes a company to recover an investment. With the use of this kind of study, businesses can assess potential investment options and select a venture that would maximize theinvestment in the shortest time if that criteria is important to them.O
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if market share for five cell phone service companies are 5%, 10%, 12%, 22%, and 51%, the four firm concentration ratio would be .
The market shares of the top four firms in the cell phone service companies 23%, 20%, 19%, and 15%. To find the four-firm concentration ratio, add 25%+10%+12%+22%+51%=120%.
One metric for assessing the level of market rivalry is the ratio of four firms. It is figured out by adding the market shares, or the proportion of total sales, of the four biggest companies in the industry. Each of the four largest companies in your chosen industry's revenue totals should be added up. Next, divide that amount by the industry's whole revenues. The four-firm concentration ratio is the outcome when you convert it to a percentage. the proportion of sales value that the four biggest companies in the sector accounted for. The concentration ratio can range anywhere between almost zero for ideal competition and 100% for monopoly. A ratio higher than 40% is a sign of oligopoly.
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Consider an asset with a beta of 1.2, a risk-free rate of 5%, and a market return of 13%.
What is the reward-to-risk ratio in equilibrium?
What is the expected return on the asset?
The (expected) needed market return is 12%, whereas the risk-free rate is 4%.
Given its risk, an asset's expected return can be calculated using the following formula:
Expected return on investment, or ER I is equal to R f plus I (ER m R f).
Risk-free rate is R f.
I = the investment's beta (ER m R f ) = the market risk premium
Expected rate of return equals (Beta * Market Risk Premium) times the risk free rate.
Return anticipated equals 2% + (1.2 x 3%)
Return rate anticipated is 4%.
Investors anticipate receiving compensation for the time value of money and risk. The time value of money is taken into consideration by the risk-free rate in the CAPM formula. The other elements of the CAPM formula take the investor's increased risk into account.
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if the fed lowers the discount rate, the money supply multiple choice question. does not change increases decreases
Banks are able to provide more discount loans when the Federal Reserve lowers the reserve ratio, which reduces the amount of cash they must store in reserves.
What happens to the money supply when the Fed lowers the discount rate?Lowering the discount rate is one way the Federal Reserve can expand the money supply. Depository institutions have more incentive to borrow when the discount rate is lower, which boosts their reserves and lending activities.
What happens if the Fed lowers the discount rate while raising it?The Fed can affect the money supply, which can support economic activity or assist in containing inflationary pressures, by raising or lowering the discount rate. If the Fed lowers the discount rate, banks are encouraged to increase lending.
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Organic Farms Company contracts to buy two tracts of land from Prime Bottomland, Inc. Both parties believe that the two tracts are adjacent, but in fact they are not. Prime Bottomland is still willing to sell the land, but under these circumstances the deal would adversely affect Organic Farms.
Refer to Fact Pattern 15-B2. The parties' belief about the adjacency of the property is
The parties' opinion that the properties are adjacent was voidable. Organic Farms Company as well as Prime Bottomland sign an agreement for the purchase of two land tracts.
What is purpose of a contract?A legally enforceable arrangement among two or more individuals is referred to as a contract. Once this contract is signed, each party promises to uphold the rights and obligations outlined in it. In essence, every contract is built around a promise.
Why are contracts so important?Legally binding agreements are practical tools for maintaining an effective business. Contracts providing business services provide the essential legal protections you need for any operation. In addition to lowering risk, contracts also protect you and your company by outlining your rights and duties in each agreement.
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Suppose the multiplier has a value that exceeds 1, and there are no crowding out effects. Which of the following would shift aggregate demand to the right by more than the increase in expenditures? an increase in investment spending an increase in government expenditures an increase in net exports All of the above are correct.
The shift in aggregate demand to the right by more than the increase in expenditures is All of the above correct.
Aggregate demand, however, reveals the total sum of the marketplace for every single product and service that a financial system produces and expresses it as a complete dollar value. as an example, a rustic may want to have a mixture of demand for goods and offerings equal to $1B according to year.
A combination call is a way of looking at the complete call for goods and offerings in any economic system. it is a tool of macroeconomists, used to assist decide or expecting typical financial strength within a rustic, in a given time frame -- normally 12 months.
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9) Which of the following is not traded in the securities markets?
A) stocks
B) bonds
C) derivatives
D) real estate
Real estate is not traded in the securities markets. Thus, Option D) is the correct answer.
Real estate includes both the land and any permanent, whether natural or man-made, structures or improvements affixed to the surface. A type of real property is real estate. It contrasts with personal property, such as cars, yachts, jewels, furniture, and farm equipment, which is not permanently affixed to the land.
A financial instrument that is fungible and negotiable and has some kind of monetary worth is referred to as a "security." Security can reflect rights to ownership as specified by an option, ownership of a bond issued by a government agency or corporation that represents a corporation, or ownership of stock that represents ownership in a corporation.
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Identify a recent business trend that could be contributing to the increased number of collusive frauds.
a. Increasing frequency of supplier alliances, and closer relationships between buyers and suppliers.
b. Reducing costs and product quality by using same suppliers.
c. Increased competition amongst suppliers.
d. Advances in technology that simplify the process of conducting business.
Supplier alliances are occurring more frequently, and suppliers and customers are getting to know one another better.
Fraud Collusion Dangers.
The standard acknowledges the dangers of collusion as well as the increased risk for the auditor in expressing an incorrect opinion, or "audit failure."
The issues with asset misappropriation and financial statement misstatement are brought up by the amended standard for auditors to consider.
Employees, suppliers, customers, and other parties must enlist the help of their co-conspirators in the first type of fraud, or at the very least work together to plan it. This is not a simple task, as it will be discussed below; in an asset theft scheme, coordination and recruitment demand a certain level of risk from the participants.
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sabrina, the engineering manager at robin tech, takes an eight-week unpaid leave to go on a tour to promote a book she wrote. she does so in accordance with robin tech’s policy for leaves without pay. in what sense could this unpaid leave be an employee benefit for sabrina? group of answer choices she uses her paid time off for the leave. her leave is based on length of service, so it accumulates over time. her time off is an example of personal days. she retains her seniority and benefits during the leave. the family and medical leave act requires the employer to grant unpaid time off.
One such unpaid leave that could be a benefit to Sabrina would be for her to retain her seniority and benefits during the leave.
What is unpaid leave?It corresponds to a leave policy that guarantees that the employee continues with his employment duties while he is absent from his work for some force majeure reason. In this type of leave, the employee does not receive compensation, as this has exceeded the benefits of the leave whose remuneration is mandatory by law.
Some types of paid leave are:
VacationPaid time offSick leaveTherefore, an unpaid leave is a legal way for the employee to leave for more days if necessary, not compromising their duties and not impacting the company's compensation plan.
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When events generated by a random process have deviated from the population average in a short run, individuals may erroneously believe that the opposite deviation becomes more likely. This summarizes the _____.Answers:illusion of controlgambler's fallacyswitching and double switchinginherent memory bias
When events generated by a random process have deviated from the population average in a short run, individuals may erroneously believe that the opposite deviation becomes more likely. This summarizes the Gambler’s fallacy.
This fallacy is a false belief that events in the past will influence events in the future, even though they are independent of each other.
Also known as Monte Carlo fallacy, it is a belief in the influence of a sequence of events independent of each other. This fallacy occurs when someone believes that because a particular event has occurred sequentially over some time, an opposite or alternate event will happen soon.
It is a logical fallacy in which an individual believes that any past event will influence the outcome of any future event.
It is important to emphasize that this fallacy does not apply when the probability of different events is not independent.
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The TelePizza chain, which operates in Europe and Latin America, has copied Domino's service model but maintains differentiation in terms of location. TelePizza is an example of a(n) ________.A) counterfeiterB) adopterC) clonerD) imitatorE) adapter
The TelePizza chain, which operates in Europe and Latin America, has copied Domino's service model but maintains differentiation in terms of location. TelePizza is an example of a(n) counterfeiter.
A counterfeit is an item that uses someone else's trademark without their permission. by making or selling a counterfeit, criminals are looking to profit unfairly from the trademark owner's recognition. Counterfeiting is a fraudulent imitation (a forgery) of a dependent on an emblem and product, and it's miles a serious crime. Counterfeiting has a right away impact on authorities' fees and tax sales. It has an unfavorable impact on employment too, that is skilled by using the retailers, suppliers, and supply chain.
Those counterfeit goods commonly bear the trademark of a legitimate and trusted brand, however, they were produced by means of every other party and aren't made to the specifications of the authentic manufacturer. they're frequently produced illegally and offered as an income to fund other criminal sports.
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based on the first graph, susan invested $50,000 and bill invested $150,000. why did susan have a higher balance at the age of 65?
Susan invested $50,000 and Bill invested $150,000. Susan had a better stability on the age of 65 due to the fact she invested in advance than him.
The required details for Bill in given paragraph
An bill, bill or tab is a commercial record issued via way of means of a seller to a purchaser referring to a sale transaction and indicating the merchandise, quantities, and agreed-upon prices for merchandise or offerings the vendor had furnished the purchaser. Payment terms are commonly said at the bill. These may also specify that the purchaser has a most range of days to pay and is once in a while presented a reduction if paid earlier than the due date. The purchaser ought to have already paid for the goods or offerings indexed at the bill. To keep away from confusion and consequent pointless communications from purchaser to seller, a few dealers surely kingdom in big and capital letters on an bill whether or not it has already been paid. From a seller's factor of view, an bill is a income bill. From a purchaser's factor of view, an bill is a buy bill. The record shows the purchaser and seller, however the term bill shows cash is owed or owing.
Within the European Union, an bill is more often than not legally described via way of means of the EU VAT directive as an accounting voucher (to confirm tax and VAT reporting) and secondly as a Civil law (not unusual place law) record.
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Merkel Corporation issues $200,000 face amount bonds with a stated interest rate of 6% . If the market interest rate is 5%, the bonds will issue at A. a discount B. a premium C. face amount
Merkel Corporation issues $200,000 face amount bonds with a stated interest rate of 6%. If the market interest rate is 5%, the bonds will issue at premium.
What is a Premium Bond?
A premium bond is one that trades above its face value, or in other words, one that is more expensive than the bond's face value. Because its interest rate is higher than the market's current rates, a bond may trade at a premium.
Another distinct category of bond issued in the UK is a premium bond. A premium bond is also known as a lottery bond in the UK and is issued by the National Savings and Investment Scheme of the British government.
Bonds that trade above their face value or cost more than their face value are referred to as premium bonds. Because its interest rate is higher than those of the current market, a bond may trade at a premium.
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which one of the following is not correct? select one: a. for debt issued at par: interest expense reported on the income statement equals the cash paid for interest. b. for bond repurchases: gain (loss) on bond repurchase
Both option A and B are correct. Option C which states " For debt issued at a discount: interest expense reported on the income statement equals cash interest payment less amortization of the discount" is not the correct answer.
A technique known as amortisation is used to lower a bond's cost base for each period in order to reflect the economic reality of the bond's impending maturity. At par, the amortisation is completed. It is simple to prepare and necessary for figuring tax returns. Additionally done yearly, it has various tax ramifications depending on the bond types. A bond is said to be sold at a discount if the market interest rate exceeds the coupon rate. For the purpose of calculating net income, the amount of the amortisation of the bonds' discount for each period of the cash coupon payment is added.
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at the beginning of year 1, kuhn corp. purchases equipment for $22,000. the equipment has a residual value of $2,000 and an expected useful life of 5 years. what is straight-line depreciation expense for year 3?
Annual depreciation at the end of year 3 is $4,000
What is annual depreciation?The standard annual rate at which a fixed asset is depreciated is known as annual depreciation. If the straight-line approach is taken, this rate is constant from year to year. If an accelerated technique is utilized, annual depreciation will peak in the early years and then start to fall off in the later years. Divided by the asset's useful life, annual depreciation is equal to the asset's cost less salvage value. The depreciation rate is the total amount depreciated each year, expressed as a percentage.
Annual depreciation
= (the cost of assets - salvage value)/ Estimated useful life
Cost - 22,000
Residual value = 2,000
Estimated useful life = 5 years
Annual depreciation = (22,000- 2,000)/5 =4,000
Annual depreciation = 4,000
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operating leverage. natural bodyworks (nb) produces the popular ab stretcher that they sell for $200 per unit. nb’s total fixed costs (fixed operating costs depreciation) for the ab stretcher are $200,000.their variable costs are $30 per unit. they are financed entirely by equity and face a 21% corporate tax rate. if sales increase from 4,000 units to 5,000 units, what is the percentage increase in noi
The net operating income at 4000 units is $480,000.
What is net operating income?The profitability of real estate investments that produce income is evaluated using a calculation known as net operating income (NOI). NOI is the total revenue from the asset less all operating costs that are deemed to be absolutely necessary. On a property's income and cash flow statement, the term "net operating income" (NOI) refers to a before-tax figure that excludes loan principal and interest payments, capital expenses, depreciation, and amortization. Along with rental income, a property may also make money from extras like parking garages, vending machines, and laundry facilities. The costs of running and maintaining the building are referred to as operating expenses and include things like insurance premiums, janitorial services, legal fees, utilities, property taxes, and repair costs.
Sales revenue(4000×200) =$800,000
Less variable costs(4000×30)=$120,000
Fixed costs =$200,000
NOI =$480,000
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cardinal industries purchased a generator that cost $11,000. it has an estimated life of five years and a residual value of $1,000. it is estimated to be good for 5,000 hours. compute the depreciation expense for the second year using the double-declining-balance method of depreciation. a.$2,000 b.$4,400 c.$2,640 d.$1,000
the depreciation expense for the second year using the double-declining-balance method of depreciation will be c.$2,640
(100% ÷ 5 years) X 2 = 40%
Depreciation for year 1 = $11,000 X 40% = $4,400.
Depreciation for year 2 = ($11,000 - $4,400) X 40% = $2,640.
A method of accounting known as the double declining balance (DDB) depreciation method entails depreciating some assets at a rate that is twice that of straight-line depreciation. As a result, depreciation increases during the first year of ownership and decreases thereafter.
When you buy assets that depreciate more rapidly in the first few years, the optimal scenario for using double declining balance depreciation is that situation. The asset that loses value the most in the first few years of ownership is a car.
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a $1,000 par value bond has coupon rate of 7% and the coupon is paid semi-annually. the bond matures in 20 years and has a required rate of return of 10%. compute the current price of this bond.
For instance, a $1,000 bond with a 7% coupon yields $70 annually. These interest payments are typically semiannual, which means the investor will get $35 twice a year.
What do you mean by a bond?Bonds are fixed-income investments that represent loans made to borrowers by investors (typically corporate or governmental).
A bond is comparable to a contract between a lender and borrower outlining the conditions of a loan and the related payments.
Savings bonds, agency bonds, municipal bonds, corporate bonds, and treasuries are some examples of bonds.
Treasury bonds, which are the safest bonds but have the lowest interest rates, are typically sold at auction.
One kind of debt instrument is a bond. It is a way for organizations or governments to raise money. Institutions issue bonds and guarantee investors regular interest payments.
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question content area top part 1 npv and maximum return a firm can purchase new equipment for a $39,000 initial investment. the equipment generates an annual after-tax cash inflow of $9,000 for 8 years. a. determine the net present value (npv) of the asset, assuming that the firm has a cost of capital of 10%. is the project acceptable?
The net present value (npv) of the asset is $90.90.
A technique for balancing initial capital investment against the current worth of all future cash flows generated by a project is called net present value (NPV).
What is the example's NPV formula?Example of NPV calculation: You anticipate a 10% return on your total investment each year, or $100. Divide the year one profits ($1001) by 1 plus the return to determine the net present value (NPV) of your cash flow (earnings) at the end of year one (so t = 1). (0.10). Rt/(1 + i)t = $1001/(1+1.10)1 = $90.90; NPV = Rt/(1 + i)t
How are capital costs determined?One typical approach is to tally up your company's annual interest costs for all debts and divide them by the entire amount of debt.
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The asset has a $90.90 net present value (NPV). Net present value is a method for weighing the initial capital expenditure against the current value of all upcoming cash flows produced by a project.
Capital is what?In the world of business, capital refers to the total sum of financial resources needed to make things or provide services. These funds could be used to launch operations, pay ongoing expenses, or grow and expand the business.
What sources of funding are there?A number of the following sources and capital providers could be used to raise capital: Bank financing, bonds Credit union funding. Money and people are the two most common forms of capital in the both business and finance.
Briefing:NPV = Rt/(1 + i)t
= (0.10). Rt/(1 + i)t
= $1001 / (1+1.10)1
NPV = $90.90.
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what type of money is a u.s. $100 bill? group of answer choices fiat money virtual money commodity money polymer money
Answer: fiat money
Explanation:
chapter 11 states that a $74 million film must earn around $111 million before earning a profit. what is the primary reason for this?\
The high cost of marketing and distribution is the reason that a $74 million film must earn around $111 million before earning a profit.
Typically, advertising, promotion, and public relations budget include marketing expenses. Each sum varies according to the size of the company, its yearly sales, and how much the rivals advertise. Marketing budgets can range from less than 1% of sales to more than 30%, depending on the industry.
Costs incurred to deliver your product from the production unit to the final customer are referred to as distribution costs (also known as distribution expenses).
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linda wants to prepare a rebuttal to the board of directors and is looking for all of the positive things the company is doing. she does not want the report to include any of the negatives because she feels that they hurt the company's image. how should you respond to such a request?
Justifying the negative information in the message by giving a reason.
In mathematics, a terrible range represents the opposite.[1] within the real quantity device, a bad variety is a variety of this is much less than zero. poor numbers are frequently used to represent the significance of a loss or deficiency. A debt this is owed may be notion of as a negative asset. If a quantity, including the rate on an electron, may have either of opposite senses, then one may also pick to differentiate between the ones senses—perhaps arbitrarily—as positive and bad. poor numbers are used to describe values on a scale that goes below 0, which include the Celsius and Fahrenheit scales for temperature.
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a bank wishes to hedge its $30 million face value bond portfolio (currently priced at 99 percent of par). the bond portfolio has a duration of 9.75 years. it will hedge with t-bond futures ($100,000 face) priced at 98 percent of par. the duration of the t-bonds to be delivered is nine years. how many contracts are needed to hedge? should the contracts be bought or sold? ignore basis risk.
NF= [9.75(0.9930m)]/[9(0.98100,000)] =328.32
328 contracts should be sold.
What is the required number of contracts to hedge the position?By multiplying the product of the optimal hedge ratio and the units of the position to be hedged by the size of one futures contract, the optimal number of contracts required to hedge a position is determined.
In investing, risk can never be completely removed. Risk, however, can be at least somewhat reduced. Thus, a trader is at least partially converting the underlying "price risk" into another type of risk, known as "base risk," when they enter into a futures contract to hedge against potential price variations.
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the 100,000 cars in your city experience unrecoverable losses of $40,000,000 per year from theft, collisions, etc. if 25% of premiums are used to cover business expenses, what premium must be charged to car owners?
Premiums are used to cover business expenses, what premium must be charged.The automobile costs $ 16615 after the $90 premium.Given that the monthly premium for a $12,000 automobile is $65 Scot's monthly auto insurance payment is $90.
In general, the term "proportion" refers to a part, share, or amount that is compared to a whole. According to the definition of proportion, two ratios are in proportion when they are equal. Two ratios or fractions are equal when an equation or a declaration to that effect is utilised.Let's say the premium is $90 and the cost of the car is x. Now, 12000:65::x:90.X=108000O/65 = 12000 x 90 = 65 x x 1080000.Let's say the premium is $90 and the cost of the car is x. At this point, 12000: 65:: x:90 12000 x 90 = 65 x x 1080000 = 65x X=1080000/65 X=16615.38 = 16615 .The price of the automobile with the premium is therefore $ 16615.
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Kitchen-Rite believes that by producing its small appliances in Canada, they can take advantage of lower wage rates in that country. By pursuing such a strategy, Kitchen-Rite hopes to realize
D) location economies.
Production of goods under the most optimum conditions can provide an additional cost advantage over competitors. This is referred to as the Location Economy.
In economics and geography, location theory is a theory concerned with the geographic location of economic activity; it has become an integral part of economic geography, regional science, and spatial economics. What economic activities are located where and why is addressed by location theory.
Economic activities can be located on a broad scale, such as a region or metropolitan area, or on a more specific scale, such as a zone, neighborhood, city block, or individual site. Over the plain, transportation costs are only proportional to the distance traveled and the volume shipped.
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division abc has $750,000 in average assets and income of $200,000. division xyz has $800,000 average assets and income of $210,000. which of the following statements is true?
This is TRUE statement. Division ABC has a higher return on investment.
ROI is commonly described because the ratio of net income over the total cost of the funding. ROI is most beneficial for your business desires whilst it refers to some thing concrete and measurable, to discover your investment's profits and financial returns.
Return on investment or go back on fees is a ratio between internet earnings and funding. A high ROI approach the funding's profits compare favourably to its value. As a overall performance degree, ROI is used to evaluate the performance of an funding or to evaluate the efficiencies of several special investments.
Return on investment is a simple ratio that divides the internet profit (or loss) from an investment through its fee. due to the fact it's miles expressed as a percent, you could examine the effectiveness or profitability of various funding alternatives.
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one year ago, your company purchased a machine used in manufacturing for$120,000. you have learned that a new machine is available that offers manyadvantages; you can purchase it for $200,000 today. it will be depreciated on astraight-line basis over 5 years, after which it has no salvage value. you expect thatthe new machine will produce ebitda (earnings before interest, taxes, depreciation,and amortization) of $100,000 per year for the next 5 years. the current machine isexpected to produce ebitda of $45,000 per year. the current machine is beingdepreciated on a straight-line basis over a useful life of 6 years, after which it willhave no salvage value, so depreciation expense for the current machine is $20,000 peryear. all other expenses of the two machines are identical. the market value today ofthe current machine is $80,000. your company’s tax rate is 45%, and the opportunitycost of capital for this type of equipment is 12%. is it profitable to replace the year-old machine?
By the use of incremental net present value under capital budgeting decision for the company it is profitable to opt for new machine instead of continuing old machine because it is positive.
What is capital budgeting decision?A capital budgeting decision entails both an investment and a financial commitment. The corporation commits money to a project, but it also invests in its long-term strategy, which will probably have an impact on initiatives it considers in the future.
By using incremental net present value mechanism the project investment decision under capital budgeting would be ascertain by following manner:
A) Incremental Present value of Initial Outlay = Cost of New machine - Opportunity market value of old asset - tax benefit on loss of sale of old machine.
⇒ $200,000 - $80,000 - {(120000-80000)×45%} = $102,000
B) Incremental Present value of Annual Cash Inflows = Cash flow after tax (CFAT) of new machine in next five years and cash flow after tax of old machine in next 6 years
∵ CFAT ⇒ EBITDA - Depreciation - Corporate tax expense + Depreciation
a) New machine = $100,000-$40,000-$27,000+$40,000 = $73000
b) Old Machine = $45,000-$20,000-$11,250+$20,000 = $33750
Now using the present value annuity factor for 5 years and six years respectively at discounting rate 12%;
c) PVAF-12% for 5 Years = 3.60
d) PVAF-12% for 6 Years = 4.11
Compute present value of CFAT:
e) = a) × c) = $73,000 × 3.60 = $262,800.00
f) = b) × d) = $33,750 × 4.11 = $138,712.50
∴ g) Incremental Annual CFAT = $124087.50
C) Incremental Net Present Value = Inflow - Outflow (A -B)
⇒ $124087.50 - $102,000
⇒ $22087.50
Thus the incremental NPV is positive hence the it is viable to acquire the new asset
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