Equipment purchase that would replace existing equipment

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Reference no: EM131856193

1. Royal Dutch Petro (RDP) is considering a new equipment purchase that would replace some existing equipment. The old equipment has a Book Value (BV) of $400 thousand and RDP estimates that the equipment could be sold for ONLY $150 thousand. What is the After Tax Salvage Value (ATSV) of the old equipment that RDP should use in their capital budgeting analysis? Assume the tax rate = T= 35%.

0, since the sale of old equipment has nothing to do with analysis of new equipment being purchased

87.5 thousand

62.5 thousand

-250 thousand

237.5 thousand

2. If you earn a 10% nominal return on an investment, are you really 10% more wealthy? (Note: Wealth is defined as the ability to purchase and/or consume goods or services.)

No, because there may be inflation, which causes your real return to be less

No, because if inflation = 0, then your real return is less

Yes, because you really have 10% more dollars

Yes, because inflation does NOT effect your real wealth

Yes, because nominal returns are the returns widely published & quoted in the press

Reference no: EM131856193

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