ch 10

The bid price always assumes which one of the following?

The net present value of the project is zero.

Dexter Smith & Co. is replacing a machine simply because it has worn out. The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its five-year life. The firm has a 34 percent tax rate, uses straight-line depreciation over an asset's life, and has a positive net income. Given this, which one of the following statements is correct?

The new machine will generate positive operating cash flows.

G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?

sunk

Which one of the following statements is correct concerning bid prices?

A firm can submit a bid that is higher than the computed bid price and still break even.

Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm is currently considering making handmade wreaths as well

Hiring additional employees to handle the increased workload should the firm accept the wreath project.

The top-down approach to computing the operating cash flow:

Ignores noncash expenses.

Pro forma statements for a proposed project should generally do all of the following except

Include interest expense.

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?

Selling fewer hot dogs because hamburgers were added to the menu.

The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following?

Tax due on the salvage value of that asset.

You own some equipment that you purchased four years ago at a cost of $287,000. The equipment is five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, .0576, for years 1 to 6, respectively. You are considering selling the equipment today for $99,000. Which one of the following statements is correct if your tax rate is 35 percent?

The aftertax salvage value is $81,707.76.

The bottom-up approach to computing the operating cash flow applies only when:

The interest expense is equal to zero.

Which one of the following is an example of a sunk cost?

$1,200 paid to repair a machine last year.

Dog Up! Franks is looking at a new sausage system with an installed cost of $348,950. This cost will be depreciated straight-line to zero over the project's six-year life, at the end of which the sausage system can be scrapped for $50,000. The sausage system will save the firm $134,400 per year in pretax operating costs, and the system requires an initial investment in net working capital of $19,500. All of the net working capital will be recovered at the end of the project. The tax rate is 35 percent and the discount rate is 12 percent. What is the net present value of this project?

$100,756.77

The Fluffy Feather sells customized handbags. Currently, it sells 18,000 handbags annually at an average price of $89 each. It is considering adding a lower-priced line of handbags that sell for $59 each. The firm estimates it can sell 7,000 of the lower-priced handbags but will sell 3,000 less of the higher-priced handbags by doing so. What is the amount of the sales that should be used when evaluating the addition of the lower-priced handbags?

$146,000

Pre-Fab purchased some machinery two years ago for $337,600. These assets are classified as five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, .0576, for years 1 to 6, respectively. The company is currently replacing this equipment with newer models at a cost of $528,000. The old equipment is being sold for $149,000. What is the aftertax salvage value from this sale if the tax rate is 35 percent?

$153,566.80

Hot and Cold has annual sales of $982,000, annual depreciation of $127,000, and net working capital of $243,000. The tax rate is 34 percent and the profit margin is 6 percent. The firm has no interest expense. What is the amount of the operating cash flow?

$185,920

You are working on a bid to build two apartment buildings a year for the next three years. This project requires the purchase of $1,089,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the project's life. The equipment can be sold at the end of the project for $815,000. You will also need $280,000 in net working capital over the life of the project. The fixed costs will be $528,000 a year and the variable costs will be $1,640,000 per building. Your required rate of return is 18 percent for this project and your tax rate is 35 percent. What is the minimal amount, rounded to the nearest $100, you should bid per building?

$2,116,200

Cool Comfort currently sells 300 Class A spas, 450 Class C spas, and 200 deluxe model spas each year. The firm is considering adding a mid-class spa and expects that, if it does, it can sell 375 of them. However, if the new spa is added, Class A sales are expected to decline to 225 units while the Class C sales are expected to decline to 200. The sales of the deluxe model will not be affected. Class A spas sell for an average of $12,000 each. Class C spas are priced at $6,000 and the deluxe model sells for $17,000 each. The new mid-range spa will sell for $8,000. What is the value of the erosion?

$2,400,000

Marie's Fashions is considering a project that will require $41,000 in net working capital and $64,000 in fixed assets. The project is expected to produce annual sales of $62,000 with associated cash costs of $41,000. The project has a three-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 34 percent. What is the operating cash flow for this project?

$21,113.33

Dependable Motors just purchased some MACRS 5-year property at a cost of $216,000. The MACRS rates are .2, .32, and .192 for years 1 to 3, respectively. Which one of the following will correctly give you the book value of this equipment at the end of year 2?

$216,000 ×(1 - .2 - .32)

The maintenance expenses on a rental house you own average $200 a month. The house cost $219,000 when you purchased it four years ago. A recent appraisal on the house valued it at $239,000. If you sell the house you will incur $14,000 in real estate fees. The annual property taxes are $4,000. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office?

$225,000

Jefferson & Sons is evaluating a project that will increase annual sales by $145,000 and annual cash costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the four-year life of the project. The applicable tax rate is 32 percent. What is the operating cash flow for this project?

$43,480

Overland Trucking just purchased some fixed assets that are classified as three-year property for MACRS. The MACRS rates are .3333, .4445, .1481, and .0741 for years 1 to 4, respectively. What is the amount of the depreciation expense in year 3 if the initial cost is $387,950?

$57,455.40

Consider an asset that costs $142,000 and is depreciated straight-line to zero over its seven-year tax life. The asset is to be used in a four-year project. At the end of the project the asset can be sold for $65,000. The tax rate is 30 percent. What is the aftertax salvage value?

$63,757.14

P.A. Petroleum just purchased some equipment at a cost of $67,000. The equipment is classified as MACRS 5-year property. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for years 1 to 6, respectively. What is the proper methodology for computing the depreciation expense for year 2?

$67,000 ×.32

Mason Farms purchased a building for $689,000 eight years ago. Six years ago, repairs costing $136,000 were made to the building. The annual taxes on the property are $11,000. The building has a current market value of $840,000 and a current book value of $494,000. The building is totally paid for and solely owned by the firm. If the company decides to use this building for a new project, what value, if any, should be included in the initial cash flow of the project for this building?

$840,000

Kelly's Corner Bakery purchased a lot in Oil City six years ago at a cost of $278,000. Today, that lot has a market value of $264,000. At the time of the purchase, the company spent $6,000 to level the lot and another $8,000 to install storm drains. The company now wants to build a new facility on that site. The building cost is estimated at $1.03 million. What amount should be used as the initial cash flow for this project?

-$1,294,000

A 5-year project has an initial fixed asset investment of $522,600, an initial net working capital investment of $13,200, and an annual operating cash flow of -$51,480. The fixed asset is fully depreciated over the life of the project and has no salvage value. The net working capital will be recovered when the project ends. The required return is 13.8 percent. What is the project's equivalent annual cost, or EAC?

-$204,795.33

ALUM, Inc. uses high-tech equipment to produce specialized aluminum products for its customers. Each one of these machines costs $1,520,000 to purchase plus an additional $48,000 a year to operate. The machines have a five-year life after which they are worthless. What is the equivalent annual cost of one these machines if the required return is 15.5 percent?

-$506,819.32

High Breeze currently produces boat sails and is considering expanding into awnings for homes and travel trailers. The company owns land that could be used for the expansion. This land was purchased fiveat a cost of $319,000 and is valued today at $395,000. The company has some unused equipment that it currently owns valued at $38,000. This equipment could be used for producing awnings if $12,000 is spent for equipment modifications. Other equipment costing $138,000 will also be required. What is the amount of the initial cash flow for this expansion project?

-$583,000

Better Beverages purchased some fixed assets classified as five-year property for MACRS. The assets cost $108,000. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for years 1 to 6, respectively. What will the accumulated depreciation be at the end of year 4?

89,337.60

Which one of the following statements is correct?

A project can create a positive operating cash flow without affecting sales.

Corner Market is considering adding a new product line that is expected to increase annual sales by $418,000 and cash expenses by $337,000. The initial investment will require $237,000 in fixed assets that will be depreciated using the straight-line method to a zero book value over the five-year life of the project. The company has a marginal tax rate of 34 percent. What is the annual value of the depreciation tax shield?

A. $16,116

A new molding machine is expected to produce operating cash flows of $68,000 a year for six years. At the beginning of the project, inventory will decrease by $14,700, accounts receivables will increase by $5,500, and accounts payable will increase by $3,200. All net working capital will be recovered at the end of the project. The initial cost of the molding machine is $279,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $51,600 aftertax cash inflow. What is the net present value of this project given a required return of 13 percent?

A. $24,061.87

Keyser Mining is considering a project that will require the purchase of $875,000 of equipment. The equipment will be depreciated straight-line to a zero book value over the seven-year life of the project after which it will be worthless. The required return is 13 percent and the tax rate is 34 percent. What is the value of the depreciation tax shield in year 4 of the project?

A. $42,500

Country Breads uses specialized ovens to bake its bread. One oven costs $189,000 and lasts about seven years before it needs to be replaced. The annual operating cost per oven is $23,800. What is the equivalent annual cost of an oven if the required rate of return is 11 percent?

A. -$63,908.69

Precision Dyes is analyzing two machines to determine which one it should purchase. The company requires a rate of return of 14 percent and uses straight-line depreciation to a zero book value over the life of its equipment. Machine A has a cost of $512,000, annual operating costs of $34,200, and a four-year life. Machine B costs $798,000, has annual operating costs of $21,500, and has a six-year life. Whichever machine is purchased will be replaced at the end of its useful life. The firm should purchase Machine _____ because it lowers the firm's annual costs by approximately _______ as compared to the other machine.

A; $16,791

Eads Industrial Systems Company (EISC) is trying to decide between two different conveyor belt systems. System A costs $538,000, has a 4-year life, and requires $133,000 in pretax annual operating costs. System B costs $630,000, has a five-year life, and requires $102,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have a zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 34 percent and the discount rate is 16 percent. Which system should the firm choose and why?

A; The net present value is -$655,664.

Which one of the following would make a mutually exclusive project unacceptable?

An equivalent annual cost that exceeds that of an alternative project.

Which one of the following will increase a bid price?

An increase in the required rate of return.

Ausel's is considering a seven- year project that will require $854,000 for new fixed assets that will be depreciated straight-line to a zero book value over the seven years. At the end of the project, the fixed assets can be sold for 20 percent of their original cost. The project is expected to generate annual sales of $928,000 and costs of $721,000. The tax rate is 35 percent and the required rate of return is 14.6 percent. What is the amount of the aftertax salvage value?

B. $111,020

Russell's is considering purchasing $388,000 of equipment for a four-year project. The equipment falls in the five-year MACRS class with annual percentages of .2, .32, .192, .1152, .1152, and .0576 for years 1 to 6, respectively. At the end of the project the equipment can be sold for an estimated $174,000. The required return is 14.6 percent and the tax rate is 34 percent. What is the amount of the aftertax salvage value of the equipment?

B. $137,635.78

You just purchased some equipment that is classified as five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. The equipment cost $218,000. What will the book value of this equipment be at the end of three years should you decide to resell the equipment at that point in time?

B. $62,784.00

Kwik Dogs is considering the installation of a new computerized pressure cooker that will cut annual operating costs by $18,400. The system will cost $42,900 to purchase and install and will be depreciated to zero using straight-line depreciation over its four-year life. What is the amount of the earnings before interest and taxes for this project?

B. $7,675

The Market Place is considering a new four-year expansion project that requires an initial fixed asset investment of $2.8 million. The fixed asset will be depreciated straight-line to zero over its four-year tax life, after which time it will have a market value of $625,000. The project requires an initial investment in net working capital of $270,000, all of which will be recovered at the end of the project. The project is estimated to generate $2,550,000 in annual sales, with costs of $1,638,000. The tax rate is 34 percent and the required return for the project is 14 percent. What is the net present value?

B. -$218,619.97

A project will produce an operating cash flow of $31,200 a year for 7 years. The initial fixed asset investment in the project will be $204,900. The net aftertax salvage value is estimated at $62,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 11 percent?

B. -$28,016.66

PGH, Inc. is considering a new six-year expansion project that requires an initial fixed asset investment of $3.102 million. The fixed asset will be depreciated straight-line to zero over its six-year tax life, after which time it will be worthless. The project is estimated to generate $1,987,000 in annual sales, with costs of $1,102,200. The tax rate is 35 percent and the required return on the project is 16 percent. What is the net present value for this project?

B. -$316,081.72

A project will require $543,000 for fixed assets, $218,000 for inventory, and $42,000 for accounts receivable. Short-term debt is expected to increase by $165,000. The project has a six-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. The project is expected to generate annual sales of $905,000 with costs of $730,000. The tax rate is 35 percent and the required rate of return is 14 percent. What is the project's cash flow at Time 0?

B. -$638,000

A potential project requires the purchase of $612,000 of equipment. The equipment will be depreciated straight-line to a zero book value over the three-year life of the project. The equipment can be scraped at the end of the project for 45 percent of its original cost. Annual sales from this project are estimated at $418,000 with cash expenses of $287,000. Net working capital equal to 25 percent of sales will be required to support the project. The required return is 12 percent and the tax rate is 35 percent. What is the cash flow in year 2 of the project?

C. $156,550

A project will require $498,000 for fixed assets and $58,000 for net working capital. The fixed assets will be depreciated straight-line to a zero book value over the five-year life of the project. At the end of the project, the fixed assets will be worthless. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $875,000 and costs of $640,000. The tax rate is 35 percent and the required rate of return is 15 percent. What is the amount of the annual operating cash flow?

C. $187,610

Phone Home, Inc. is considering a new six-year expansion project that requires an initial fixed asset investment of $5.876 million. The fixed asset will be depreciated straight-line to zero over its six-year tax life, after which time it will be worthless. The project is estimated to generate $5,328,000 in annual sales, with costs of $2,131,200. The tax rate is 32 percent. What is the annual operating cash flow for this project?

C. $2,487,211

A proposed three-year project will require $627,000 for fixed assets, $169,000 for inventory, and $43,000 for accounts receivable. Accounts payable are expected to increase by $178,000. The fixed assets will be depreciated straight-line to a zero book value over five years. At the end of the project, the fixed assets can be sold for $225,000. The net working capital returns to its original level at the end of the project. The operating cash flow per year is $62,000. The tax rate is 35 percent and the discount rate is 12 percent. What is the total cash flow in the final year of the project?

C. $330,030

Webster & Moore paid $148,000, in cash, for equipment three years ago. At the beginning of last year, the company spent $21,000 to update the equipment with the latest technology. The company no longer uses this equipment in its current operations and has received an offer of $96,000 from a firm that would like to purchase it. The firm is debating whether to sell the equipment or to expand its operations so that the equipment can be used. The equipment, including the updates, has a book value of $44,500. When evaluating the expansion option, what value, if any, should the firm assign to this equipment as an initial cost of the project?

C. $96,000

changes in the net working capital requirements:

Can affect the cash flows of a project every year of the project's life.

The operating cash flow of a cost-cutting project:

Can be positive even though there are no sales.

Net working capital:

Can create either an initial cash inflow or outflow.

The equivalent annual cost considers all of the following except the:

Costs of research conducted to identify equipment choices.

Nelson Mfg. owns a manufacturing facility that is currently sitting idle. The facility is located on a piece of land that originally cost $159,000. The facility itself cost $1,390,000 to build. As of now, the book value of the land and the facility are $159,000 and $458,000, respectively. The firm owes no debt on either the land or the facility at the present time. The firm received a bid of $1,700,000 for the land and facility last week. The firm's management rejected this bid even though they were told that it is a reasonable offer in today's market. If the firm was to consider using this land and facility in a new project, what cost, if any, should it include in the project analysis?

D. $1,700,000

Colors and More is considering replacing the equipment it uses to produce crayons. The equipment would cost $1.37 million, have a 12-year life, and lower manufacturing costs by an estimated $310,000 a year. The equipment will be depreciated over 12 years using straight-line depreciation to a book value of zero. The required rate of return is 15 percent and the tax rate is 35 percent. What is the annual operating cash flow?

D. $241,458.33

Pet Supply purchased some fixed assets two years ago at a cost of $43,800. It no longer needs these assets so it is going to sell them today for $32,500. The assets are classified as five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, .0576, for years 1 to 6, respectively. What is the net cash flow from this sale if the firm's tax rate is 35 percent?

D. $28,483.40

Winnebagel Corp. currently sells 28,200 motor homes per year at $42,300 each, and 11,280 luxury motor coaches per year at $79,900 each. The company wants to introduce a new portable camper to fill out its product line. It hopes to sell 19,740 of these campers per year at $11,280 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 4,700 units per year, and reduce the sales of its motor coaches by 1,222 units per year. What is the amount that should be used as the annual sales figure when evaluating this project?

D. $323,839,400

A project has projected sales of $26,000, cash expenses of $18,500, depreciation of $1,730, taxes of $1,400, and an initial cash requirement of $2,200 for working capital. What is the amount of the operating cash flow using the top-down approach?

D. $6,100

Home Furnishings is expanding its product offerings to reach a wider range of customers. The expansion project includes increasing floor inventory by $656,000 and increasing its debt to suppliers by 85 percent of that amount. The company will also spend $1,110,000 for a building contractor to expand the size of its showroom. As part of the expansion plan, the company will be offering credit to its customers and thus expects accounts receivable to rise by $275,000. For the project analysis, what amount should be used as the initial cash flow for net working capital?

D. -$373,400

Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs and machine lives, and will be replaced when worn out. Which one of the following computational methods should Dan use as the basis for his decision?

Equivalent annual cost.

Decreasing which one of the following will increase the acceptability of a project?

Equivalent annual cost.

Your firm is contemplating the purchase of a new $1,049,000 computer-based order entry system. The system will be depreciated straight-line to zero over its three-year life. It will be worth $156,300 at the end of that time. You will save $423,500 before taxes per year in order processing costs and you will be able to reduce working capital by $115,764 (this is a one-time reduction). The net working capital will return to its original level when the project ends. The tax rate is 35 percent. What is the internal rate of return for this three-year project?

D. 12.74 percent

Which one of the following is a project cash inflow? Ignore any tax effects.

Decrease in accounts receivable.

The net book value of equipment will:

Decrease slower under straight-line depreciation than under MACRS.

Increasing which one of the following will increase the operating cash flow assuming that the bottom-up approach is used to compute the operating cash flow?

Depreciation expense.

Assume you are considering two mutually exclusive machines and need to select one for a cost-cutting project. Which one of these sets of characteristics best indicates the use of the equivalent annual cost method of analysis?

Differing lives and planned replacement at end of life.

The Lunch Counter is expanding and expects operating cash flows of $32,500 a year for seven years as a result. This expansion requires $28,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $2,800 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 14 percent?

E. $109,688.89

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following?

Equivalent annual cost.

Gateway Communications is considering a project with an initial fixed asset cost of $2.872 million which will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $714,000 a year. The tax rate is 35 percent. The project will require $52,000 of inventory which will be recouped when the project ends. What is the net present value at the required rate of return of 13.6 percent?

E. $136,691.88

You are working on a bid to build two city parks a year for the next three years. This project requires the purchase of $218,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the three-year project life. The equipment can be sold at the end of the project for $65,000. You will also need $12,000 in net working capital for the duration of the project. The fixed costs will be $22,000 a year and the variable costs will be $171,000 per park. Your required rate of return is 16 percent and your tax rate is 34 percent. What is the minimal amount you should bid per park? (Round your answer to the nearest $100)

E. $229,000

The Card Shoppe needs to maintain 18 percent of its sales in net working capital. Currently, the store is considering a four -year project that will increase sales from its current level of $279,000 to $308,000 the first year and to $314,000 a year for the following three years of the project. What amount should be included in the project analysis for net working capital in year 4 of the project?

E. $6,300

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

Incremental.

The bid price is:

The minimum price that will provide your target rate of return

All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0?

Initial investment in inventory to support the project

The operating cash flow for a project should exclude which one of the following?

Interest expense.

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine that has the:

Lowest equivalent annual cost.

Which one of the following should not be included in the analysis of a new product?

Money already spent for research and development of the new product

Hunter's Hut is considering a project that will require additional inventory of $176,000 and will increase accounts payable by $148,000. Accounts receivable is currently $305,000 and is expected to increase by 11 percent if this project is accepted. What is the project's initial cash flow for net working capital?

NWC requirement = -$176,000 + $148,000 - ($305,000 ×.11) = - $61,550

Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero?

Net income + Depreciation

Houston's is considering a project that will produce incremental annual sales of $234,000 and increase cash expenses by $148,000. If the project is implemented, taxes will increase from $31,000 to $34,000, and depreciation will increase from $41,000 to $46,000. The company is debt-free. What is the amount of the operating cash flow using the top-down approach?

OCF = $234,000 - 148,000 - ($34,000 - 31,000) = $83,000

A proposed expansion project is expected to increase sales of JJ's Store by $58,000 and increase cash expenses by $36,100. The project will require $36,900 of fixed assets that will be depreciated using straight-line depreciation to a zero book value over the three-year life of the project. The store has a marginal tax rate of 35 percent. What is the operating cash flow of the project using the tax shield approach?

OCF = ($58,000 - 36,100) (1 - .35) + ($36,900 / 3) (.35) = $18,540

Webster's has sales of $649,000 and a profit margin of 7.2 percent. The annual depreciation expense is $102,600. What is the amount of the operating cash flow if the company has no long-term debt?

OCF = ($649,000 ×.072) + $102,600 = $149,328

Three years ago, Knox Glass purchased a machine for a three-year project. The machine is being depreciated straight-line to zero over a five-year period. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value

Sale price + (Book value - Sale price) ×T

Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances?

Selling furniture to appliance customers.

The equivalent annual cost method is useful in determining:

Which one of two machines should be purchased when the machines are mutually exclusive, have different lives, and will be replaced at the end of their lives.

A company that utilizes the MACRS system of depreciation:

Will have a greater depreciation tax shield in year 2 than in year 1.

A project has sales of $611,208, cash costs of $338,911, and depreciation expense of $74,209. The tax rate is 34 percent and the discount rate is 14 percent. What amount should be used as the depreciation tax shield when computing the project's operating cash flow?

depreciation tax shield = $74,209 ×.34 = $25,231.06