Fundamentals Of Corporate Finance, 9th Edition
9th Edition
ISBN: 9781260052220
Author: Richard Brealey; Stewart Myers; Alan Marcus
Publisher: McGraw-Hill Education
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Chapter 9, Problem 22QP
Summary Introduction
To determine: After tax salvage value.
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Your new employer, Freeman Software, is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33.33%, 44.45%, 14.81%, and 7.41% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project's 10-year expected life. What is the Year 1 cash flow?
Equipment cost (depreciable basis)
$65,000
Sales revenues, each year
$60,000
Operating costs (excl. deprec.)
$25,000
Tax rate
25.0%
a. $36,869
b. $31,849
c. $35,114
d. $31,666
e. $33,442
Outback is purchasing a new machine that will cost $98,000. The machine will qualify as MACRS 5-year property but
has an economic life of 8 years. The new machine is expected to increase revenues by $35,000 per year, and
operating costs are expected to increase by $15,000 per year. If the firm's marginal tax rate is 34 percent and the first
year's depreciation rate is 20 percent, what is the net cash flow in the first year.
a.
$7,984
b.
$26,034
c.
$19,864
d.
$264
5. Does your company want to purchase this machine that will provide cost savings of $100,000
annually for its useful life (8 years)? The cost is $250,000; tax rate is 36% and discount rate is
14%. Compute straight-line depreciation for 8 years with zero salvage value. Calculate the cash
flows and determine the NPV and IRR. Does your company want to buy this machine?
Chapter 9 Solutions
Fundamentals Of Corporate Finance, 9th Edition
Ch. 9 - Prob. 1QPCh. 9 - Prob. 2QPCh. 9 - Prob. 3QPCh. 9 - Prob. 4QPCh. 9 - Prob. 5QPCh. 9 - Prob. 6QPCh. 9 - Prob. 7QPCh. 9 - Prob. 8QPCh. 9 - Prob. 10QPCh. 9 - Prob. 12QP
Ch. 9 - Prob. 13QPCh. 9 - Prob. 14QPCh. 9 - Prob. 15QPCh. 9 - Prob. 17QPCh. 9 - Prob. 20QPCh. 9 - Prob. 21QPCh. 9 - Prob. 22QPCh. 9 - Prob. 23QPCh. 9 - Prob. 24QPCh. 9 - Prob. 25QPCh. 9 - Prob. 26QPCh. 9 - Prob. 27QPCh. 9 - Prob. 28QPCh. 9 - Prob. 29QPCh. 9 - Prob. 30QPCh. 9 - Prob. 32QPCh. 9 - Prob. 34QP
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- What is the NPV of project D? Assume that the firm requires a minimum after-tax return of 8% on investment. Project D costs $5,000 and will generate sales of $4,000 each year for 5 years. The cash expenditures will be $1,500 per year. The firm uses straight-line depreciation with an estimated salvage value of $500 and has a tax rate of 25%. (2) What is the book rate of return based on the average book value? (Round your answer to 2 decimal places.)arrow_forwardYou are interested in purchasing a machine that will save $200,000 per yearbefore taxes. The cost of operating the machine, including maintenance, is $80,000 per year. The machine, which costs $150,000, will be needed for five years after which it will have a salvage value of $25,000. The machine would qualify for 7-year MACRS property. What is the net present value of the cash flows generated from this machine at 15%? The firm's income tax rate is 40%.arrow_forward. A company is considering the purchase of a new printer. It can purchase the printer for $900 and sell its current printer for $300 today. The new printer will last for 6 years and save $200 a year in expenses. The opportunity cost of capital is 15%, and the firm's tax rate is 40%. If the firm uses straight line-depreciation to a salvage value of zero over a six year life, what are project’s cash flows and NPV? Should the company purchase the new printer?arrow_forward
- considering the purchase of a machine costing P700,000 with a useful life of 10 years. Annual cash cost savings are expected to be P200,000. Prot income tax rate is 25% and its cost of capital is 12%. Prot expects to use straight-line depreciation for tax purposes. Question: a. Compute the expected increase in annual net cash flow for this project. b. Compute the profitability index for the project.arrow_forwardWilson Corp, is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $50,000. The equipment will have an initial cost of $600,000 and have an 8-year life. The salvage value of the equipment is estimated to be $100,000. If the hurdle rate is 10%, what is the approximate net present value? (Future Value of $1. Present Value of $1. Future Value Annuity of $1. Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.) Multiple Choice $500,000 $46,826 $100,000 Less than zeroarrow_forwardHomer Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $164,800. The equipment will have an initial cost of $515,000 and have a 5-year life. If the salvage value of the equipment is estimated to be $11,000, what is the annual net cash flow? Multiple Choice $153,800 $64,000 $265,600 $175,800arrow_forward
- Nelson Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $105,000. The equipment will have an initial cost of $420,000 and have a 5 year life. If the salvage value of the equipment is estimated to be $80,000, what is the payback period? Ignore income taxes. Multiple Choice 3.24 years 4.00 years 4.76 years 7.00 yearsarrow_forwarda company can buy a machine that is expected to have a three-year life and a 30,000 salvage value. the machine will cost 1,80,00 and is expected to produce a 200,000 after-tax net income to be received at the end of each year. what is the net present value of the cash flows from the investment, discounted at 12%? Choices 118,855 705,391 583,676 1,918,855 629,788arrow_forwardYou arc interested in purchasing a machine that will save $200,000 per yearbefore taxes. The cost of operating the machine, including maintenance, is $80,000 per year. The machine, which costs $150,000, will be needed for five years after which it will have a salvage value of $25,000. The machine would qualify for a 7-year MACRS property. What is the net present value of the cash flows generated from this machine at 15%? The firm's income tax rate is 40%.arrow_forward
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