FINANCE

The tax savings generated as a result of a firm’s depreciation expense is called the: depreciation tax shield
You are considering the purchase of new equipment. Your analysis includes the evaluation of two machines which have differing initial and ongoing costs and differing lives. You should select the machine which has the: lowest equivalent annual cost
Wiley Electric just purchased some MACRS 5-year property at a cost of $118,000. Which one of the following will correctly give you the book value of this equipment at the end of year 3?MACRS 5-year propertyYear Rate1 20.00%2 32.00%3 19.20%4 11.52%5 11.52%6 5.76% $118,000 x (1 – .20 – .32 – .192)
A project’s operating cash flow will increase when: depreciation expense increases
Shelly’s Boutique is evaluating a project which will increase annual sales by $70,000 and annual costs by $40,000. The project will initially require $100,000 in fixed assets which will be depreciated straight-line to a zero book value over the 5-year life of the project. The applicable tax rate is 34 percent. What are the operating cash flows for this project from years 1-5 and what is the NPV of the entire project if the WACC is 7%?
Superior Manufacturers is considering a 3-year project with an initial cost of $846,000. The project will not directly produce any sales but will reduce operating costs by $295,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $30,000. The tax rate is 34 percent. The project will require $31,000 in extra inventory for spare parts and accessories. Should this project be implemented if Superior Manufacturing requires an 8 percent rate of return? Why or why not? No; The NPV is -$87,820.48.
A project is expected to create operating cash flows of $35,000 a year for four years. The initial cost of the fixed assets is $100,000. These assets will be worthless at the end of the project. An initial $5,000 of net working capital will be required at the project’s start. What is the project’s net present value if the required rate of return is 11 percent? $6,879.25
The Furniture Makers purchased some fixed assets three years ago for $52,000. The assets are classified as 5-year property for MACRS. The company is considering selling these assets now so they can buy some newer fixed assets which utilize the latest in technology. The company has been offered $15,500 for these old assets. What is the net cash flow from the salvage value if the tax rate is 34 percent?MACRS 5-year propertyYear Rate1 20.00%2 32.00%3 19.20%4 11.52%5 11.52%6 5.76% $15,321.84
Allied Partners just purchased some fixed assets that are classified as 3-year property for MACRS. The assets cost $2,400. What is the amount of the depreciation expense in year 4?MACRS 3-year propertyYear Rate1 33.33%2 44.44%3 14.82%4 7.41% $177.84
A firm is considering a project that will increase sales by $135,000 and cash expenses by $105,000. The project will cost $120,000 and be depreciated using the straight-line method to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 34 percent. What is the value of the depreciation tax shield? $10,200
The Clothing Co. is looking at a project that will require and initial increase of $40,000 in net working capital and $100,000 in fixed assets. The project is expected to produce annual sales of $90,000 with associated costs of $60,000. The project has a 10-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35 percent. What are the operating cash flows for this project and what is the IRR for this entire project? $23,000; 12.45%

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