EBK CFIN
6th Edition
ISBN: 9781337671743
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 10, Problem 1PROB
Summary Introduction
MACRS stands for modified accelerated cost recovery system. Life of the asset will be classified as per the internal revenue code.
Three years MACRS rates, Year 1: 33.33%, Year 2: 44.45%, Year 3: 14.81% and Year 4: 7.41%.
CWC bought machine that is expected to generate $25,000 in operating income before
Expert Solution & Answer
Explanation of Solution
a.
Calculate the after tax operating income as follows:
Formulas:
b.
Calculate the operating cash flows for year 1 as follows:
Therefore, the operating cash flows in year 1 is
Calculate the operating cash flows for year 2 as follows:
Therefore, the operating cash flows in year 2 is
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Students have asked these similar questions
The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the
truck are given below. The company's cost of capital is 8%.
Year
0
1
2
3
4
5
Annual Operating Cash Flow Salvage Value
-$22,500
6,250
6,250
6,250
6,250
6,250
a. What is the optimal number of years to operate the truck? Do not round intermediate calculations. Round your answers to the nearest whole number.
years
-Select- ✓
b. Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
I. No. Salvage possibilities could only raise NPV and IRR.
II. Yes. Salvage possibilities could only lower NPV and IRR.
III. Salvage possibilities would have no effect on NPV and IRR.
$22,500
17,500
14,000
11,000
5,000
0
APJ, Inc. is planning to purchase a new machine that will take six years to recover the cost. The new machine is expected to produce cash flow from operations, net of income taxes, of P4,500 a year for the first three years of the payback period and P3,500 a year of the last three years of the payback period. Depreciation of P3,000 a year shall be charged to income of the six years of the payback period. How much shall the machine cost? *
A. P12,000
B. P18,000
C. P24,000
D. P36,000
TXY Inc, recently purchased a new delivery truck. The new truck cost $25,000., and it is expected to generate net after-tax operating cash flows of $7, 500 per year. The truck has a 4-year expected life. The expected salvage values after tax adjustments for the truck are as follows. Year Annual Operating Cash Flow Salvage Value 0 25,000 25,000 17,500 19,500 2 7, 500 15,000 3 7,500 13,000 4 7,500 0 The company's cost of capital is 10%. Should the firm operate the truck until the end of its 4-year physical life? If not, then what is the optimal economic life? Make sure you show the NPV for various economic life? Please explain and use finance calculator to solve
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- The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given below. The company's cost of capital is 11 percent. Year Annual Operating Cash Flow Salvage Value 0 1 2 3 4 5 -$22,500 6,250 6,250 6,250 6,250 6,250 $22,500 17,500 14,000 11,000 5,000 0 a. What is the optimal number of years to operate the truck? Do not round intermediate calculations. Round your answers to the nearest whole number. years b. Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project? I. Salvage possibilities would have no effect on NPV and IRR. II. No. Salvage possibilities could only raise NPV and IRR. III. Yes. Salvage possibilities could only lower NPV and IRR. -Select-varrow_forwardAn asset with a first cost of $7,000 is depreciated using the Modified Accelerated Cost recovery System (MACRS) over a 5-year period. The cash flow before taxes (CFBT) is estimated at $10,000 for the first 4 years and $5000 thereafter as long as the asset is retained. The effective tax rate is 40%, and the money is worth 8% per year. In present worth dollars, how much of the cash flow generated by the asset over its recovery period is lost to taxes?arrow_forwardThe Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given below. The company's cost of capital is 10%. Year Annual Operating Salvage ValueCash Flow________________________________________________ 0 (22,500) 22,5001 6,250 17,5002 6,250 14,0003 6,250 11,0004 6,250 5,0005 6,250 0 a. Should the firm operate the truck until the end of its 5-year physical life, or, if not, what is its optimal economic life? b. Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project? Explainarrow_forward
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