MANAGERIAL ACCOUNTING F/MGRS.
5th Edition
ISBN: 9781259969485
Author: Noreen
Publisher: RENT MCG
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Textbook Question
Chapter 7C, Problem 7C.5P
Income Taxes and
Shimano Company has an opportunity to manufacture and sell one of two new products for a five-year period. The company’s tax rate is 30% and its after-tax cost of capital is 14%. The cost and revenue estimates for each product are as follows:
Required:
- Calculate the annual income tax expense for each of Years 1 through 5 that will arise if Product A is introduced.
- Calculate the net present value of the investment opportunity pertaining to Product A.
- Calculate the annual income tax expense for each of Years 1 through 5 that will arise if Product B is introduced.
- Calculate the net present value of the investment opportunity pertaining to Product B.
- Calculate the project profitability index for Product A and Product B. Which of the two products should the company pursue? Why?
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4a4) New equipment costs $645,000 and is expected to last for four years with no salvage value. During this time, the company will use a 30% CCA rate. The new equipment will save $155,000 annually before taxes. If the company's required rate of return is 12%, determine the PVCCATS of the purchase. Assume the half-year rule applies and a tax rate of 33%.
6. A machine could be purchased for £800,000; it would be used for 3 years and then sold for £580,000. It would qualify for capital allowances at 18% reducing balance basis with a balancing allowance or charge on disposal. The company pays tax at 20% and has a cost of capital of 10%.
What is the present value of the tax cashflow at time 1, to the nearest £100?
A £14,700
B £26,200
C £28,800
D £144,000
8. A machine could be purchased for £800,000; it would be used for 3 years and then sold for £580,000. It would qualify for capital allowances at 18% reducing balance basis with a balancing allowance or charge on disposal. The company pays tax at 20% and has a cost of capital of 10%.
What is net present value of the tax cashflows over the life of the machine, to the nearest £100?
A £6,300
B £39,400
C £52,000
D £60,200
Chapter 7C Solutions
MANAGERIAL ACCOUNTING F/MGRS.
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