HW M10CH10 FIn
An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $12,960,000 and will be sold for $2,880,000 at the end of the project. If the tax rate is 25 percent, what is the aftertax salvage value of the asset?
BV4 = $12,960,000 - 12,960,000(0.2000 + 0.3200 + 0.1920 + 0.1152)BV4 = $2,239,488 The asset is sold at a gain to book value, so this gain is taxable. Aftertax salvage value = $2,880,000 + ($2,239,488 - 2,880,000)(.25)Aftertax salvage value = $2,719,872 $2,719,872
Consider the following income statement: Sales $ 839,408 Costs 546,112 Depreciation 124,200 Taxes 23 % Calculate the EBIT. Calculate the net income. Calculate the OCF. What is the depreciation tax shield?
Calculate the EBIT. EBIT = (Sales - costs - depreciation) = (839408 - 546112 - 124200) = 169096 Calculate the net income. =169096*23%= 38892.08 =169096-38892.08=130,204 Calculate the OCF. The OCF for the company is: OCF = EBIT + Depreciation - TaxesOCF = $169,096 + 124,200 - 38,892OCF = $254,404 What is the depreciation tax shield? The depreciation tax shield is the depreciation times the tax rate, so: Depreciation tax shield = TcDepreciationDepreciation tax shield = .23($124,200)
Quiz M10Ch10
Quiz M10Ch10
Winnebagel Corp. currently sells 39,000 motor homes per year at $58,500 each, and 15,600 luxury motor coaches per year at $110,500 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 24,700 of these campers per year at $15,600 each. An independent consultant has determined that if the company introduces the new campers, it should boost the sales of its existing motor homes by 5,850 units per year, and reduce the sales of its motor coaches by 1,170 units per year. What is the amount to use as the annual sales figure when evaluating this project?
Sales due solely to the new product line are:24,700 ($15,600) = $385,320,000 Increased sales of the motor home line occur because of the new product line introduction; thus: 5,850 ($58,500) = $342,225,000 in new sales is relevant. Erosion of luxury motor coach sales is also due to the new mid-size campers;thus: 1,170 ($110,500) = $129,285,000 loss in sales is relevant. The net sales figure to use in evaluating the new line is thus: $385,320,000 + 342,225,000 - 129,285,000 = $598,260,000 $598,260,000
The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?
Stand-alone principle
Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.754 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will be worthless. The project is estimated to generate $2,448,000 in annual sales, with costs of $979,200. If the tax rate is 25 percent, what is the OCF for this project?
Using the tax shield approach to calculating OCF (Remember the approach is irrelevant; the final answer will be the same no matter which of the four methods you use.), we get: OCF = (Sales - Costs)(1 - tC) + tCDepreciationOCF = ($2,448,000 - 979,200)(1 - .25) + .25($2,754,000/3)OCF = $1,331,100
The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:
incremental cash flows.
