Firm X needs 1 computer. Firm X can buy 1 computer for 3,059. The cost of debt for Firm X is 5%. The corporate tax equals 35%. Firm X follows a straight-line depreciation method and the economic life of the computer is 2 years. Compute the depreciation tax shield of year 2.
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Firm X needs 1 computer. Firm X can buy 1 computer for 3,059. The cost of debt for Firm X is 5%. The corporate tax equals 35%. Firm X follows a straight-line
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- Big Sky Mining Company must install 1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the following facts apply. (1) The machinery falls into the MACRS 3-year class. (2) Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance. (3) The firms tax rate is 25%. (4) The loan would have an interest rate of 15%. It would be nonamortizing, with only interest paid at the end of each year for four years and the principal repaid at Year 4. (5) The lease terms call for 400,000 payments at the end of each of the next 4 years. (6) Big Sky Mining has no use for the machine beyond the expiration of the lease, and the machine has an estimated residual value of 250,000 at the end of the 4th year. a. What is the cost of owning? b. What is the cost of leasing? c. What is the NAL of the lease?Wonderful Company thinks it may need a new color printing press. The press will cost $500,000 but will substantially reduce operating costs by $250,000 per year, before tax. The press has 30% CCA rate and will remain in its asset pool. The first CCA deduction is made in year 0. The press will operate for 4 years and then be worthless. The cost of equity Is 12%, the pre-tax cost of debt is 8%, and the company’s target debt-equity ratio is .5. The company’s tax rate is 30%. a) What is the NPV of buying the press? Show your work. b) The equipment manufacturer if offering to lease the press for 4 years for $112,000 a year, payable in advance i.e. at the beginning of the year. Should Wonderful Company accept the offer? Give reasons in support of your conclusion.Wonderful Company thinks it may need a new color printing press. The press will cost $500,000 but will substantially reduce operating costs by $250,000 per year, before tax. The press has 30% CCA rate and will remain in its asset pool. The first CCA deduction is made in year 0. The press will operate for 4 years and then be worthless. The cost of equity Is 12%, the pre-tax cost of debt is 8%, and the company’s target debt-equity ratio is .5. The company’s tax rate is 30%. a. What is the NPV of buying the press? b. The equipment manufacturer if offering to lease the press for 4 years for $112,000 a year, payable in advance i.e. at the beginning of the year. Should Wonderful Company accept the offer? Give reasons in support of your conclusion. Show all of your working using a financial calculator.
- Floopy Co has decided to purchase new equipment. They are in the 38% tax bracket. The desired equipment costs $77,000 and it can be financed entirely with a 12% loan which requires annual end-of-year payments of $32,059 for 3 years. The firm will depreciate the equipment under MACRS using a 3-year recovery period (depreciation is 33% in year 1, 45% in year 2 and 15% in year 3). The firm will pay $2,000 per year for a maintenance contract. Calculate the present value of the cash outflows for the purchase alternative.Printing World thinks it may need a new color printing press. The press will cost $500,000 but will substantially reduce operating costs by $250,000 per year, before tax. The press has 30% CCA rate and will remain in its asset pool. The first CCA deduction is made in year 0. The press will operate for 4 years and then be worthless. The cost of equity Is 12%, the pre-tax cost of debt is 8%, and the company’s target debt-equity ratio is .5. The company’s tax rate is 30%. a) What is the NPV of buying the press? b) The equipment manufacturer if offering to lease the press for 4 years for $112,000 a year, payable in advance i.e. at the beginning of the year. Should Printing accept the offer? Give reasons in support of your conclusion.Printing World thinks it may need a new color printing press. The press will cost $500,000 but will substantially reduce operating costs by $250,000 per year, before tax. The press has 30% CCA rate and will remain in its asset pool. The first CCA deduction is made in year 0. The press will operate for 4 years and then be worthless. The cost of equity Is 12%, the pre-tax cost of debt is 8%, and the company’s target debt-equity ratio is .5. The company’s tax rate is 30%. a) What is the NPV of buying the press? b) The equipment manufacturer is offering to lease the press for 4 years for $112,000 a year, payable in advance i.e. at the beginning of the year. Should Printing World accept the offer? Give reasons in support of your conclusion. Show all of your working. Do not use Excel.
- As the director of a construction firm, you are considering buying a new cement mixing truck for $103, 000. At the end of its useful life of 5 years, you expect to be able to sell it for $4, 300. the mixing truck is expected to have annual operating and maintenance expenses of $2, 300 Your cement-mixing truck is expected to depreciate for tax purposes at a declining balance rate of 25%. The corporate income tax rate is 30%. Your company’s WACC is 11%. Assume the asset pool remains open after selling the item. Calculate the equivalent annual after-tax cost., the half-year rule should be used where applicable. Round your answer to the nearest dollarCandy Crush Inc. buys $1 million machine that will depreciate in straight line over the next 5 years. The machine is expected to make a new product that will generate new revenue of $1 million each year. Additional materials and administrative cost is expected to be 40% of the revenue. To finance the purchase, the company got a 5-year loan at 5% interest. Finally, corporate tax rate of Candy Crush is 20%. a) Based on the information given, construct the income statement of Candy Crush in year 1 and show its net income. b) What is the Cash Flow from Operation of Candy Crush in year 1? c) Construct Cash Flow from Investment and Cash Flow from Financing in year Assume that the loan is an amortized loan.You are expanding your operations and buying a new machine. The new machine will cost $440,000 and will cost $22,000 to ship and install. The new machine will make more products so you will need to purchase $40,000 of inventory to meet the demand. You plan to operate the machine for two years and then sell the machine for $200,000. The corporate tax rate is 35%. If the depreciation rates are 12% in Year 1 and 18% in Year 2, what is the depreciation tax shield for Year 1 of the project? Group of answer choices A. $21,696.00 B. $17,680.00 C. $18,984.00 D. $19,404 E. $18,080.00
- White Corporation has decided to purchase a new machine that costs $3.2 million. The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax rate is 35%. The Black Bank has offered White a 4-year loan for $3.2 million. The repayment schedule is four yearly principal repayments of $800,000 and an interest charge of 9% on the outstanding balance of the loan at the beginning of each year. Both principal repayments and interest are due at the end of each year. Grey Leasing Corporation offers to lease the same machine to White. Lease payments of $950,000 per year are due at the beginning of each of the four years of the lease. a. Should White lease the machine or buy it with bank financing? b. What is the annual lease payment that will make White indifferent to whether it leases the machine or purchases it?Benton is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over four years using the straight-line method. The new cars are expected to generate $245,000 per year in earnings before taxes and depreciation for four years. The company is entirely financed by equity and has a 24 percent tax rate. The required return on the company’s unlevered equity is 14 percent and the new fleet will not change the risk of the company. The risk-free rate is 7 percent. a. What is the maximum price that the company should be willing to pay for the new fleet of cars if it remains an all-equity company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Suppose the company can purchase the fleet of cars for $615,000. Additionally, assume the company can issue $350,000 of four-year debt to finance the project at the risk-free rate of 7 percent. All principal…Wolfson Corporation has decided to purchase a new machine that costs $5.1 million. The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax rate is 35 per cent. The Sur Bank has offered Wolfson a four-year loan for $5.1 million. The repayment schedule is four-yearly principal repayments of $1,275,000 and an interest charge of 9 per cent on the outstanding balance of the loan at the beginning of each year. Both principal repayments and interest are due at the end of each year. Cal Leasing Corporation offers to lease the same machine to Wolfson. Lease payments of $1.5 million per year are due at the beginning of each of the four years of the lease. a) Should Wolfson lease the machine of buying it with bank financing? b) What is the annual lease payment that will make Wolfson indifferent to whether it leases the machine or purchases it?