Texon Oil is being sued for price fixing and environmental damage. The litigation started this year and is expected to last five years. There is no doubt that Texon is guilty, but the settlement cost will be between $3 billion and $22 billion. Explain how you would recommend Texon address this in its current year financial statements.
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- Clark Ski Company is considering an acquisition of Sally Parka Company, a firm that has had big tax losses over the past few years. As a result of the acquisition, Clark believes that the total pretax profits of the merger will not change from their present level for 5 years. The tax loss carryforward of Sally is $800,000, and Connors projects that its annual earnings before taxes will be $280,000 per year for each of the next 15 years. These earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger. The firm is in the 40% tax bracket. If Clark does not make the acquisition, (a.)what will be the company’s tax liability and (b.)earnings after taxes in Year 3? If the acquisition is made, (a.)what will be the company’s tax liability and (b.)earnings after taxes in year 3?A construction company is considering acquiring a new earthmover. The purchase price is $105,000, and an additional $28,000 is required to modify the equipment for special use by the company. The equipment falls into the MACRS seven-year classification (the tax life), and it will be sold after five years (the project life) for $55,000. The purchase of the earthmover will have no effect on revenues, but the machine is expected to save the firm $70,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21%. Assume that the initial investment is to be financed by a bank loan at an interest rate of 6% payable annually. Determine the after-tax cash flows by using the generalized cash flow approach and the worth of the investment for this project if the firm's MARR is known to be 11%.Prophet Company signed a long-term purchase contract to buy timber from the U.S. Forest Service at $300 per thousand board feet. Under these terms, Prophet must cut and pay $6,000,000 for this timber during the next year. Currently, the market value is $250 per thousand board feet. At this rate, the market price is $5,000,000. Jerry Herman, the controller, wants to recognize the loss in value on the year-end financial statements, but the financial vice president, Billie Hands, argues that the loss is temporary and should be ignored. Herman notes that market value has remained near $250 for many months, and he sees no sign of significant change. Instructions (a) What are the ethical issues, if any? (b) Is any particular stakeholder harmed by the financial vice president's decision? (c) What should the controller do?
- St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from $30,000 to $52,000 per year. The new machine will cost $82,500, and it will have an estimated life of 8 years and no salvage value. The new riveting machine is eligible for 100% bonus depreciation at the time of purchase. The applicable corporate tax rate is 25%, and the firm's WACC is 20%. The old machine has been fully depreciated and has no salvage value. What is the NPV of the project? Negative value, if any, should be indicated by a minus sign. Round your answer to the nearest cent.St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from $30,000 to $44,000 per year. The new machine will cost $80,000, and it will have an estimated life of 8 years and no salvage value. The new riveting machine is eligible for 100% bonus depreciation at the time of purchase. The applicable corporate tax rate is 25%, and the firm's WACC is 18%. The old machine has been fully depreciated and has no salvage value. What is the NPV of the project? Negative value, if any, should be indicated by a minus sign. Round your answer to the nearest cent. Should the old riveting machine be replaced by the new one? Yes or NoArnold Inc. is considering a new project that requires use of an existing warehouse, which the firm acquired three years ago for $1 million and which it currently rents out for $121,000. Rental rates are not expected to change going forward. In addition to using the warehouse, the project requires an upfront investment into machines and other equipment of $1.6 million. This investment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc. expects to terminate the project at the end of eight years and to sell the machines and equipment for $471,000. Finally, the project requires an initial investment into net working capital equal to 10% of predicted first-year sales. Subsequently, net working capital is 10% of the predicted sales over the following year. Sales of protein bars are expected to be $4.6 million in the first year and to stay constant for eight years. Total manufacturing costs and operating expenses (excluding depreciation) are…
- St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from $27,000 to $44,000 per year. The new machine will cost $85,000, and it will have an estimated life of 8 years and no salvage value. The new riveting machine is eligible for 100% bonus depreciation at the time of purchase. The applicable corporate tax rate is 25%, and the firm's WACC is 20%. The old machine has been fully depreciated and has no salvage value. What is the NPV of the project? Negative value, if any, should be indicated by a minus sign. Round your answer to the nearest cent.$ Should the old riveting machine be replaced by the new one?St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings from $24,000 to $46,000 per year. The new machine will cost $80,000, and it will have an estimated life of 8 years and no salvage value. The new riveting machine is eligible for 100% bonus deprecia tion at the time of purchase. The applicable corporate tax rate is 25%, and the firm's WACC is 10%. The old machine has been fully depreciated and has no salvage value. Should the old riveting machine be replaced by the new one? Explain your answer.St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings from $24,000 to $46,000 per year. The new machine will cost $80,000, and it will have an estimated life of 8 years and no salvage value. The new riveting machine is eligible for 100% bonus depreciation at the time of purchase. The applicable corporate tax rate is 25%, and the firm’s WACC is 10%. The old machine has been fully depreciated and has no salvage value. Should the old riveting machine be replaced by the new one? Explain your answer.
- Dinoco Petroleum faces three potential contingency situations, described below. Dinoco’s fiscal year ends December 31, 2021, and it issues its 2021 financial statements on March 15, 2022. Required: Determine the appropriate means of reporting each situation for the year ended December 31, 2021, and record any necessary entries. Explain your reasoning. 1. In the initial trial, Dinoco lost a $130 million lawsuit resulting from a dispute with a supplier. The case is under appeal. Although Dinoco is unable to predict the outcome, it does not expect the case to have a material adverse effect on the company. 2. In November 2020, the state of Texas filed suit against Dinoco, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On January 12, 2022, Dinoco reached a settlement with state authorities. Based upon discussions with legal counsel, it is probable that Dinoco will require $150 million to cover the cost of violations. 3. Dinoco…Mustang Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $275,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value after the seven years. Operating revenues from the facility are expected to be $110,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 5 percent. Production costs at the end of the first year will be $35,000, in nominal terms, and they are expected to increase at 6 percent per year. The real discount rate is 8 percent. The corporate tax rate is 38 percent. Calculate the NPV of the project.Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $272,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value after the seven years. Operating revenues from the facility are expected to be $107,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 5 percent. Production costs at the end of the first year will be $32,000, in nominal terms, and they are expected to increase at 6 percent per year. The real discount rate is 8 percent. The corporate tax rate is 34 percent. Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places