First Chance Company is considering purchasing a bulldozer. The bulldozer will cost $125,000 and will have an estimated salvage value of $35,000 at the end of five years. The asset will generate annual before-tax revenues of $75,000 over the next five years. The asset is depreciated at a CCA rate of 30%. The marginal tax rate is 35% and the firm's market interest rate is known to be 12%. All dollar figures represent constant dollars and are responsive to the general inflation rate f a) With f = 5%, compute the after-tax cash flows in actual dollars. b) Suppose the initial cost of the porrect will be financed trhough a local bank at an interest rate of 10%. With this additional condition, recalculate the after-tax cash flows in actual dollars.

First Chance Company is considering purchasing a bulldozer. The bulldozer will cost $125,000 and will have an estimated salvage value of $35,000 at the end of five years. The asset will generate annual before-tax revenues of $75,000 over the next five years. The asset is depreciated at a CCA rate of 30%. The marginal tax rate is 35% and the firm's market interest rate is known to be 12%. All dollar figures represent constant dollars and are responsive to the general inflation rate f a) With f = 5%, compute the after-tax cash flows in actual dollars. b) Suppose the initial cost of the porrect will be financed trhough a local bank at an interest rate of 10%. With this additional condition, recalculate the after-tax cash flows in actual dollars.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 5PB: Mason, Inc., is considering the purchase of a patent that has a cost of $85000 and an estimated...

See similar textbooks

Similar questions

Mason, Inc., is considering the purchase of a patent that has a cost of $85000 and an estimated revenue producing lite of 4 years. Mason has a required rate of return that is 12% and a cost of capital of 11%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated revenue producing life of 4 years. Falkland has a cost of capital of 8%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
3. Suppose that the new equipment has a cost basis of $12,000 and a salvage value of $3,000 at the end of 6 years. This asset is depreciated by the Straight-Line method. The effective income tax rate is 40 % and the after-tax MARR ic = 10%. If the company is going to sell this asset after 3 years at the market value of $6,000, what is the minimum profit per year this asset should produce to breakeven the investment? (20%)
ACDC Company is considering the installation of a new machine that costs $150,000. The machine is expected to lead to net income of $44,000 per year for the next 5 years. Using straight-line depreciation, $0 salvage value, and an effective income tax rate of 28%, determine the after-tax rate of return for this investment. If the company’s after-tax MARR rate is 12%, would this be a good investment or not?
Planet Enterprises is purchasing a $9.6 million machine. It will cost $48,000 to transport and install the machine. The machine has a depreciable life of five years using straight-line depreciation and will have no salvage value. The machine will generate incremental revenues of $4.1 million per year along with incremental costs of $1.1 million per year. Planet's marginal tax rate is 30% . You are forecasting incremental free cash flows for Daily Enterprises. What are the incremental free cash flows associated? The free cash flow for year 0 will be ? The free cash flow for years 1-5 will be ?
A corporation is considering purchasing a machine that will save $150,000 per year before taxes. The cost of operating the machine (including maintenance) is $30,000 per year. The machine will be needed for five years, after which it will have azero salvage value. MACRS depreciation will be used, assuming a three-year class life. The marginalincome tax rate is 40%. If the firm wants 15% return on investment after taxes, how much can it afford topay for this machine? [use closes approximate value]
A firm is considering purchasing a machine that costs $56000. It will be used for six years, and the salvage value at that time is expected to be zero. The machine will save $45000 per year in labor, but it will incur $9000 in operating and maintenance costs each year. The machine will be depreciated according to five-year MACRS. The firm's tax rate is 40%, and its after-tax MARR is 14%. Should the machine be purchased?
b. Cendrawasih Inc. is considering replacing the equipment it uses to produce crayons. The equipment would cost RM1.37 million, have a 12-year life, and lower manufacturing costs by an estimated RM304,000 a year. The equipment will be depreciated 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. Determine the net income from this proposed project.
Your firm needs a machine which costs $210,000, and requires $36,000 in maintenance for each year of its 7 year life. After 3 years, this machine will be replaced. The machine falls into the MACRS 7-year class life category. Assume a tax rate of 40% and a discount rate of 15%. What is the depreciation tax shield for this project in year 7?