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You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $23,000 to purchase and which will have OCF of -$3,000 annually throughout the vehicle's expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $31,500 to purchase and which will have OCF of -$1,550 annually throughout that vehicle's expected 4-year life. Both cars will be worthless at the end of their life. You intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future. If the business has a cost of capital of 12 percent, calculate the EAC. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)
1 Annual Depreciation = (price of equipment-book value)/no. of useful years = (945000-145000)/10 =$80000 Tax benefit = tax rate*annual dpreciation =34%*80000 =$27200 Present Value: Year Cashflow Present Value 1 27200 24070.80 2 27200 21301.59 3 27200 18850.96 4 27200 16682.27 5 27200 14763.07 6 27200 13064.66 7 27200 11561.65 8 27200 10231.55 9 27200 9054.47 10 27200 8012.80 Present Value 147593.82 Hence, the present value is $147593.82 One iteration of each delivery car will consist of the following cash flows: Year 0 1 2 3 4 Scion xA CFs -$ 23,000 -$ 3,000 -$ 3,000 -$ 3,000 Toyota Prius CFs -$ 31,500 -$ 1,550 -$ 1,550 -$ 1,550 -$ 1,550 CF/(1+i)^x=cf/(1+i)^0 + cf1/(1+i)^2 cf2/(1+i)^3 =-23000/(1.12)^0 + -3000/(1.12)^1 -3000/(1.12)^3 = -30205.49 Treating this as the present value of a 3-period annuity, setting i to 12 percent, and solving for payment will yield a payment of -$12,576.03, which is the Scion's EAC. The NPV of one Toyota Prius will be: CF/(1+i)^x=cf/(1+i)^0 + cf1/(1+i)^2 cf2/(1+i)^3 =-35000/(1.12)^0 + -1550/(1.12)^1 + -1550/(1.12)^2 + -1550/(1.12)^3 + -1550/(1.12)^4 = -362-7.49 Treating this as the present value of a 4-period annuity, setting i to 12 percent, and solving for payment will yield a payment of -$11,920.88, which is the Toyota's EAC. Based on the EACs, we should choose the Toyota.
Suppose you sell a fixed asset for $123,000 when it's book value is $151,000. If your company's marginal tax rate is 28%, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)? $151,000 $28,000 $130,840 $20,160
AT CF = $151,000 + ($123,000 − $151,000) x (1 − .28) = $130,840
Suppose you sell a fixed asset for $112,000 when its book value is $132,000. If your company's marginal tax rate is 39 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?
ATCF $ 119,800 Explanation: The after-tax cash inflow from the sale of the asset will be: ATCF = Book value + (Market value - Book value) × (1 - TC ) = $132,000 + ($112,000 - $132,000) × (1 - 0.39) = $119,800
Suppose you sell a fixed asset for $129,000 when its book value is $149,000. If your company's marginal tax rate is 40 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?
Calculation of after tax cash flow of this sale of fixed asset: After tax cash flows = Book value + (Market value - Book value) * (1- Tax) = $149,000 + ($129,000 - $149,000) * (1- 0.40) = $149,000 - $20,000 *0.60 = $149,000 - $12,000 =$137,000 Therefore, after tax cash flows of the company $137,000. ATCF $ 137,000 Explanation: The after-tax cash inflow from the sale of the asset will be: ATCF = Book value + (Market value - Book value) × (1 - TC ) = $149,000 + ($129,000 - $149,000) × (1 - 0.40) = $137,000
Your firm needs a computerized machine tool lathe which costs $58,000 and requires $12,800 in maintenance for each year of its 3-year life. After three years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 35 percent and a discount rate of 13 percent.
Depr = Ending Book Value - Beginning Book Value/Life of Asset =945000-145000/10 years =80000 per year PVAn=pmt x {1 -1/(1i)^n /i] =27200 X [1- 1/(1+0.13)^10 /0.13 =147593.82
Your company is considering a new project that will require $1,033,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $153,000 using straight-line depreciation. The cost of capital is 13 percent, and the firm's tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation. (Round your answer to 2 decimal places.)
Depr = Ending Book Value - Beginning Book Value/Life of Asset = 1,033,000 - 153,000/10 = 88000 Tax Saving = 88000*.34 = 29920 PVA = 29920*(1-1/(1+.13)^10)/.13 = 162353.20 Answer is 162353.20 dep=dep bas-ending bk val/life of asset =1033000-153000/10 yrs 88ooo per yr With a 34 percent tax rate, this depreciation will save you $88,000 × 0.34 = $29,920 in taxes each year. Across the entire project, these savings will constitute a 10-period annuity PVAn=pmt x {1 -1/(1i)^n /i] =29922 x [1-1/(10.13)^10 /13] =162353.2
Your Company is considering a new project that will require $20,000 of new equipment at the start of the project. The equipment will have a depreciable life of 6 years and will be depreciated to a book value of $1,400 using straight-line depreciation. The cost of capital is 8%, and the firm's tax rate is 40%. Estimate the present value of the tax benefits from depreciation. $1,860 $5,732 $3,100 $1,240
Depreciation = ($20,000 − $1,400)/6 = $3,100 $3,100 x .40= $1,240 tax savings each period. Across the entire project, these savings will constitute a 6 period annuity. Pmt = 1,240, FV = 0, I = 8, N = 6, PV = 5,732
Your firm needs a computerized machine tool lathe which costs $45,000 and requires $11,500 in maintenance for each year of its 3-year life. After three years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 34 percent and a discount rate of 12 percent. Calculate the depreciation tax shield for this project in year 3. (Round your answer to 2 decimal places.)
Depreciation tax shield $ 2,265.93 ± 0.1% Explanation: Depreciation in year 3 will be 14.81% × $45,000 = $6,664.50. This will save the firm $6,664.50 × 0.34 = $2,265.93 in taxes.
Your company is considering a new project that will require $945,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $145,000 using straight-line depreciation. The cost of capital is 13 percent, and the firm's tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation. (Round your answer to 2 decimal places.)
Depreciation tax shield $ 3,006.43 ± 0.1% Explanation: Depreciation in year 3 will be 14.81% × $58,000 = $8,589.80. This will save the firm $8,589.80 × 0.35 = $3,006.43 in taxes.
Your company has spent $380,000 on research to develop a new computer game. The firm is planning to spend $58,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $6,800. The machine has an expected life of 7 years, a $43,000 estimated resale value, and falls under the MACRS 10-Year class life. Revenue from the new game is expected to be $480,000 per year, with costs of $280,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 13 percent, and it expects net working capital to increase by $68,000 at the beginning of the project. What will be the net cash flow for year one of this project? $132,268 -$67,068 $130,000 $2,268
Sales 480,000 -Fixed costs -280,000 -Depreciation -6,480 =EBIT 193,520 - Taxes -67,732 = Net Income 125,788 + Depreciation 6,480 OCF 132,268
You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $24,000 to purchase and which will have OCF of -$3,200 annually throughout the vehicle's expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $32,500 to purchase and which will have OCF of -$1,650 annually throughout that vehicle's expected 4-year life. Both cars will be worthless at the end of their life. You intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future. If the business has a cost of capital of 13 percent, calculate the EAC. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)
Scion's EAC $ -13,364.53 ± 0.1% Toyota's EAC $ -12,576.31 ± 0.1% Which one should you choose? Toyota correct Explanation: One iteration of each delivery car will consist of the following cash flows: Year 0 1 2 3 4 Scion xA CFs -$ 24,000 -$ 3,200 -$ 3,200 -$ 3,200 Toyota Prius CFs -$ 32,500 -$ 1,650 -$ 1,650 -$ 1,650 -$ 1,650 NPV of Scion can be calculated in Excel as =-24000-PV(13%,3,-3200). This is equal to -31,555.69 Scion's EAC can be calculated in Excel as =PMT(13%,3,31555.69). This is equal to -13,364.53, i.e. negative 13,364.53 NPV of Toyota can be calculated in Excel as =-32500-PV(13%,4,-1650). This is equal to -37,407.88 Toyota's EAC can be calculated in Excel as =PMT(13%,4,37407.88). This is equal to -12,576.31, i.e. negative 12,576.31 Answer is as below: Scion's EAC $-13,364.53 Toyota's EAC $-12,576.31
Your company is considering a new project that will require $848,000 of new equipment at the start of the project. The equipment will have a depreciable life of 8 years and will be depreciated to a book value of $152,000 using straight-line depreciation. The cost of capital is 11 percent, and the firm's tax rate is 30 percent. Estimate the present value of the tax benefits from depreciation. (Round your answer to 2 decimal places.)
The depreciation per year will be: Depreciation=Depreciable basis - Ending book value/life of asset =$848,000 - $152,000/ 8 years =$87,000 per year With a 30 percent tax rate, this depreciation will save you $87,000 × 0.3 = $26,100 in taxes each year. Across the entire project, these savings will constitute a 8-period annuity Pvan=PMT x [1- 1/(1+i)^n / i] =26100 x[1- 1/(1+.11)^8 /.11] =$134,313.8
Your company is considering a new project that will require $855,000 of new equipment at the start of the project. The equipment will have a depreciable life of 9 years and will be depreciated to a book value of $144,000 using straight-line depreciation. The cost of capital is 12 percent, and the firm's tax rate is 35 percent. Estimate the present value of the tax benefits from depreciation. (Round your answer to 2 decimal places.)
The depreciation per year will be: Depreciation=Depreciable basis - Ending book value/life of asset =$855,000 - $144,000 / 9 years =$79,000 per year With a 35 percent tax rate, this depreciation will save you $79,000 × 0.35 = $27,650 in taxes each year. Across the entire project, these savings will constitute a 9-period annuity Pvan=PMT x [1- 1/(1+i)^n / i] =27650 x [1- 1/(1+.12)^9 /.12] =147,326.11
