Chapter 10

An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $6,060,000 and will be sold for $1,260,000 at the end of the project. If the tax rate is 34 percent, what is the aftertax salvage value of the asset? Refer to Table 10.7.

1. find total annual depreciation 2. find net book value 3. find gain on sale and calculate the taxes on the gain 4. add taxes to salvage value to get after tax CF

Winnebagel Corp. currently sells 28,000 motor homes per year at $66,000 each, and 11,000 luxury motor coaches per year at $103,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 23,000 of these campers per year at $13,000 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 2,400 units per year, and reduce the sales of its motor coaches by 1,100 units per year. What is the amount to use as the annual sales figure when evaluating this project?

1. new camper= 23,000*13,000= 299,000,000 2. increase motor homes= 2,400*66,000= 158,400,000 3. decrease motor coaches= 1,100*103,000= -113,300,000 4. add them all = 344,100,000

Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $5.2 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would net $5.5 million. The company wants to build its new manufacturing plant on this land; the plant will cost $12.7 million to build, and the site requires $790,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project?

=12,700,000+790,000+ 5,500,000= 18,990,000

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.7 million. The fixed asset is classified as a three-year MACRS asset. The project is estimated to generate $2,080,000 in annual sales, with costs of $775,000. The project requires an initial investment in net working capital of $300,000, and the fixed asset will have a market value of $210,000 at the end of the project. If the tax rate is 35 percent, what is the project's year 0 net cash flow? Year 1? Year 2? Year 3?

year 0: -2,700,000+ -300,000= -3,000,000