CONNECT ONLINE ACCESS F/MANAGERIAL ACC.
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ISBN: 9781264445356
Author: Noreen
Publisher: MCG
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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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QUESTION 1
A new machine is to be purchased for $200,000. The company believes it will generate $75,000 annually in
revenue due to the purchase of this machine. The company will have to train an operator to run this
machine and this will result in additional labor expenses of $25,000 annually. The new machine will be
depreciated using 5 years MACRS, even though the life of the project is 7 years, and the salvage value is
estimated to be $0 at the end of year 7. The tax rate is 40% and the company's MARR is 15%.
b.
eBook
The Lesseig Company has an opportunity to invest in one of two mutually exclusive machines that will produce a product the company will need for the next a
years, Machine A has an after-tax Jost of $8.7 million but will provide after-tax inflows of $4.9 million per year for 4 years. If Machine A were replaced, es
after-tax cost would be $9.9 million due to inflation and its after-tax cash inflows would increase to $5.4 million due to production efficiencies Machine has
an after-tax cost of $13 million and will provide after-tax inflows of $4.2 million per year for 8 years. If the WACC is 8%, which machine should be acquired?
Explain, Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round
your answers to two decimal places.
is the better project and will increase the company's value by $
Machine A
Machine B
V
millions, rather than the s
11.14 millions created by
Question
1-
A $12,000 investment will return annual benefit for six yearswith no salvage value at the end of six years. Assumestraight line depreciation and a 46% tax rate and the inflationrate is 5%. What is the inflation free after tax rate ofreturn on the investment if the annual benefits are $2,918 intoday’s dollars?
a. 10.18%
b. 4.94%
c. 5%
d. 8.20%
Chapter 7C Solutions
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