Factors That Complicate Capital Investment AnalysisAdditional factors may affect the outcome of a capital investment decision. Some of the most important of these factorsthat may warrant consideration include the following:•Income tax•Proposals with unequal lives•Lease versus capital investment•Uncertainty•Changes in price levels•Qualitative considerations Show Income TaxIn many cases, federal income tax may have a material impact on capital investment decisions. For example,in determining depreciation for federal income tax purposes, statutory useful lives are often much shorterthan actual useful lives. Since depreciation is deductible in determining taxable income, accelerateddepreciation allowed under tax regulations can affect a project’s expected cash flows.The total cost subjected to depreciation is the same for tax and book purposes, but rules for tax depreciationoften result in the acceleration of depreciation. Thus, depreciation for tax purposes often exceeds thedepreciation for financial statement purposes in the early years of an asset’s use. Tax reductions in early yearsof an assets life are offset by higher taxes in the later years when depreciation is lower. Thus, accelerateddepreciation does not result in a long-run saving in taxes but it can affect the timing of cash flows.The timing of the cash outflows for income taxes can have a significant impact on capital investment analysis. Proposals with Unequal LivesPrevious discussions of alternative methods of analyzing capital investment proposals were based on theassumption that all investments had the same useful lives. In practice, however, alternative proposals mayhave unequal lives. Ignoring differences in the useful lives of alternative investments can distort the presentvalue analysis and adversely affect decisions. The difference in useful lives can be addressed by adjusting thecash flow assumptions of the proposals to end at the same time.To illustrate, assume that alternative investments, a truck and computers, are being compared. The truck hasa useful life of 8 years, and the computer network has a useful life of 5 years. Each proposal requires an initialinvestment of $100,000, and the company desires a rate of return of 10%. To equate the investment periods,we assume that the truck will be sold at the end of 5 years. The residual value of the truck at the end of fiveyears, i.e., the proceeds that would be generated by selling the truck, is estimated and this value is thenincluded as a cash flow at that date. Both investments will then have 5-year lives, and net present valueanalysis can be used to compare the proposals over the same 5-year period.If the truck’s estimated residual value is $40,000 at the end of year 5 but the computers have no residualvalue, the net present value for the truck will exceed the net present value for the computers. Using the 10%rate and using residual values to analyze the projects over 5 years, the net present value of the truck is Asked by tonyajefferson12 All of the following are factors that may complicate capital investment analysis except a.changes in price levels b.possible leasing alternatives c.federal income tax ramifications d.sunk costs Answer & Explanation Solved by verified expert Rated Helpful Answered by payaljain3 lestie conseq itur laoreet. Nam risus ante, dapibus a molestie consequat, ultrices ac magna. Fusce dui lectus, congue vel laoreet ac, dictum vitae odio. Donec aliquet. Lorem ipsum dolor sit amet, consectetur adipiscing elit. Nam lacinia pulvinar tortor nec facilisis. Pellentesque dapibus efficitur laoreet. Unlock full access to Course Hero Explore over 16 million step-by-step answers from our library Subscribe to view answer Step-by-step explanation
itur laoreet. Nam risus ante, dapibus a molestie consequat, ultrices ac magna. Fusce dui lectus, , dictum vitae odio. Donec aliquet. Lorem ipsum dolor sit amet, consectetur adipiscing elit. Nam la facilisis. Pellentesque dapibus efficitur laoreet. Nam risus ante, dapibus a molestie consequ s a molestie consequat, ultrices ac magna. Fusce dui lectus, congue vel laoreet ac, dictum vitae odio. Donec aliquet. Lorem ipsum dolor sit amet, consectetur adipisc Student review 100% (1 rating) "thank you for the help" What factors complicate capital investment analysis?Factors that may complicate capital investment analysis include the impact of the federal income tax, unequal lives of alternative proposals, leasing, uncertainty, changes in price levels, and qualitative considerations.
What factors are to be considered while doing capital investment?Let us take a look at a few such factors that you must consider while making an investment decision.. Reason of investment.. Researching the market.. Risk levels.. Investment Tenure.. Taxations.. Liquidity.. Volatility.. The Company.. What is capital investment analysis?Capital investment analysis is a budgeting procedure that companies and government agencies use to assess the potential profitability of a long-term investment. Capital investment analysis assesses long-term investments, which might include fixed assets such as equipment, machinery, or real estate.
Which of the following is not a method of analyzing capital investments?Answer and Explanation: The correct option is (d) Payback and unadjusted rate of return. Both the payback method and unadjusted rate of return do not use the present value method for analyzing capital investment alternatives.
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Which of the following is a factor that complicates capital investment analysis?
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