Your company, CSUS Inc., is considering a new project whose data are shown below. The required equipment has a 3-year tax life. Under the new law, the equipment used in the project is eligible for 100% bonus depreciation, so the equipment will be fully depreciated at t= 0. The equipment has no salvage value at the end of the project's life, and the project does not require any additional operating working capital. Revenues and operating costs are expected to be constant over the project's 10-year expected operating life. What is the project's Year 4 cash flow? Equipment cost $70,000 $38,500 Sales revenues, each year. Operating costs $25,000 Tax rate 25.0% Oa. $13,500 Ob. $16,875 Oc. $10,800 Od. $10,125 Oe. $15,958

Your company, CSUS Inc., is considering a new project whose data are shown below. The required equipment has a 3-year tax life. Under the new law, the equipment used in the project is eligible for 100% bonus depreciation, so the equipment will be fully depreciated at t= 0. The equipment has no salvage value at the end of the project's life, and the project does not require any additional operating working capital. Revenues and operating costs are expected to be constant over the project's 10-year expected operating life. What is the project's Year 4 cash flow? Equipment cost $70,000 $38,500 Sales revenues, each year. Operating costs $25,000 Tax rate 25.0% Oa. $13,500 Ob. $16,875 Oc. $10,800 Od. $10,125 Oe. $15,958

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter10: The Basics Of Capital Budgeting: Evaluating Cash Flows

Section: Chapter Questions

Problem 12MC: You are also considering another project that has a physical life of 3 years—that is, the machinery...

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Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
Wendys boss wants to use straight-line depreciation for the new expansion project because he said it will give higher net income in earlier years and give him a larger bonus. The project will last 4 years and requires 1,700,000 of equipment. The company could use either straight line or the 3-year MACRS accelerated method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life. (Ignore the half-year convention for the straight-line method.) The applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%, as discussed in Appendix 11A. The project cost of capital is 10%, and its tax rate is 25%. a. What would the depreciation expense be each year under each method? b. Which depreciation method would produce the higher NPV, and how much higher would it be? c. Why might Wendys boss prefer straight-line depreciation?
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?
The following two statements concern depreciation: 1. Because our plant was shut down for part of the year, we will not depreciate it. Depreciating it for the full year would increase our costs and overstate the inventory. 2. I think we should have increasing depreciation expense each period because it will increase the funds recovered near the end of the assets life when maintenance costs are high and we will need to replace the asset. Also, I think tax rates will be higher toward the end of the assets life, so we will be better off to have a larger amount of depreciation expense then. Required: Prepare a short report that evaluates each of the following statements separately.
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Manny Carson, certified management accountant and controller of Wakeman Enterprises, has been given permission to acquire a new computer and software for the companys accounting system. The capital investment analysis showed an NPV of 100,000. However, the initial estimates of acquisition and installation costs were made on the basis of tentative costs without any formal bids. Manny now has two formal bids, one that would allow the firm to meet or beat the original projected NPV and one that would reduce the projected NPV by 50,000. The second bid involves a system that would increase both the initial cost and the operating cost. Normally, Manny would take the first bid without hesitation. However, Todd Downing, the owner of the firm presenting the second bid, is a close friend. Manny called Todd and explained the situation, offering Todd an opportunity to alter his bid and win the job. Todd thanked Manny and then made a counteroffer. Todd: Listen, Manny, this job at the original price is the key to a successful year for me. The revenues will help me gain approval for the loan I need for renovation and expansion. If I dont get that loan, I see hard times ahead. The financial stats for loan approval are so marginal that reducing the bid price may blow my chances. Manny: Losing the bid altogether would be even worse, dont you think? Todd: True. However, if you award me the job, Ill be able to add personnel. I know that your son is looking for a job, and I can offer him a good salary and a promising future. Additionally, Ill be able to take you and your wife on that vacation to Hawaii that weve been talking about. Manny: Well, you have a point. My son is having an awful time finding a job, and he has a wife and three kids to support. My wife is tired of having them live with us. She and I could use a vacation. I doubt that the other bidder would make any fuss if we turned it down. Its offices are out of state, after all. Todd: Out of state? All the more reason to turn it down. Given the states economy, it seems almost criminal to take business outside. Those are the kind of business decisions that cause problems for people like your son. Required: Evaluate the ethical behavior of Manny. Should Manny have called Todd in the first place? Would there have been any problems if Todd had agreed to meet the lower bid price? Identify the parts of the Statement of Ethical Professional Practice (Chapter 1) that Manny may be violating, if any.
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Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life. Under the new tax law, the equipment used in the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t = 0. The equipment would have a zero salvage value at the end of the project’s life. No change in net operating working capital (NOWC) would be required. Revenues and operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number. Risk-adjusted WACC 10.0% Equipment cost $65,000 Sales revenues, each year $55,500 Annual operating costs $25,000 Tax rate 25.0%
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