6b. A large profitable corporation is considering a capital investment of $50,000. The equipment has a projected salvage value of $0 at the end of thetwo-year project period. The annual gross income each of the next two years is projected to be $44,000 and expenses are projected to be $14,000annually. The depreciation amount will be $25,000 annually. This profitable corporation has an incremental income tax rate of 25% and the MARR is10%.The corporation has decided to use borrowed capital to finance a portion of the equipment purchase. It will pay $30,000 down and finance thebalance at an effective interest rate of 5%, to be repaid in two equal end-of-year payments (see loan details below).PaymentBoYEoYYearBalanceTotalInterest$30,000.00 $16,134.15 $1,500.00 $14,634.15PrincipalBalance$15,365.8515,365.8516,134.1532,268.29768.2915,365.8530,000.000.002,268.29Determine the taxable income for Year 2 (only - not the total).

Taxable income refers to the net income that is derived after deducting all the expenses in a year…

Answered: 15,365.85 16,134.15 32,268.29 Determine…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter21: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 9P

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Cost of Capital, Net Present Value Leakam Companys product engineering department has developed a new product that has a 3-year life cycle. Production of the product requires development of a new process that requires a current 100,000 capital outlay. The 100,000 will be raised by issuing 60,000 of bonds and by selling new stock for 40,000. The 60,000 in bonds will have net (after-tax) interest payments of 3,000 at the end of each of the 3 years, with the principal being repaid at the end of Year 3. The stock issue carries with it an expectation of a 17.5% return, expressed in the form of dividends at the end of each year (with 7,000 in dividends expected for each of the next 3 years). The sources of capital for this investment represent the same proportion and costs that the company typically has. Finally, the project will produce after-tax cash inflows of 50,000 per year for the next 3 years. Required: 1. Compute the cost of capital for the project. (Hint: The cost of capital is a weighted average of the two sources of capital, where the weights are the proportion of capital from each source.) 2. CONCEPTUAL CONNECTION Compute the NPV for the project. Explain why it is not necessary to subtract the interest payments and the dividend payments and appreciation from the inflow of 50,000 in carrying out this computation.
Manzer Enterprises is considering two independent investments: A new automated materials handling system that costs 900,000 and will produce net cash inflows of 300,000 at the end of each year for the next four years. A computer-aided manufacturing system that costs 775,000 and will produce labor savings of 400,000 and 500,000 at the end of the first year and second year, respectively. Manzer has a cost of capital of 8 percent. Required: 1. Calculate the IRR for the first investment and determine if it is acceptable or not. 2. Calculate the IRR of the second investment and comment on its acceptability. Use 12 percent as the first guess. 3. What if the cash flows for the first investment are 250,000 instead of 300,000?
Washington-Pacific (W-P) invested $4 million to buy a tract of land and plant some young pine trees. The trees can be harvested in 10 years, at which time W-P plans to sell the forest at an expected price of $8 million. What is W-P’s expected rate of return?
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 here. The company’s cost of capital is 10%. Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life? Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?

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15,365.85 16,134.15 32,268.29 Determine the taxable income for Year 2 (only - not the total)