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