61.
A proposed expansion project is expected to increase sales of JL Ticker’s
Store by $41,000 and increase cash expenses by $21,000. The project will
cost $28,000 and be depreciated using straight-line depreciation to a zero
book value over the 4-year life of the project. The store has a marginal tax
rate of 30 percent. What is the operating cash flow of the project using the
tax shield approach?
62.
The Lumber Yard is considering adding a new product line that is expected
to increase annual sales by $238,000 and cash expenses by $184,000. The
initial investment will require $96,000 in fixed assets that will be
depreciated using the straight-line method to a zero book value over the 6-
year life of the project. The company has a marginal tax rate of 32 percent.
What is the annual value of the depreciation tax shield?
63.
Bernie’s Beverages purchased some fixed assets classified as 5-year
property for MACRS. The assets cost $94,000. What will the accumulated
depreciation be at the end of year three?
64.
You just purchased some equipment that is classified as 5-year property for
MACRS. The equipment cost $147,000. What will the book value of this
equipment be at the end of 4 years should you decide to resell the
equipment at that point in time?
65.
Peterborough Trucking just purchased some fixed assets that are classified
as 3-year property for MACRS. The assets cost $10,600. What is the amount
of the depreciation expense in year 3?
66.
Crafter’s Supply purchased some fixed assets 2 years ago at a cost of
$38,700. It no longer needs these assets so it is going to sell them today for
$25,000. The assets are classified as 5-year property for MACRS. What is
the net cash flow from this sale if the firm’s tax rate is 30 percent?
67.
You own some equipment that you purchased 4 years ago at a cost of
$225,000. The equipment is 5-year property for MACRS. You are
considering selling the equipment today for $87,000. Which one of the
following statements is correct if your tax rate is 35 percent?
68.
Edward’s Manufactured Homes purchased some machinery 2 years ago for
$319,000. These assets are classified as 5-year property for MACRS. The
company is replacing this machinery today with newer machines that utilize
the latest in technology. The old machines are being sold for $140,000 to a
foreign firm for use in its production facility in South America. What is the
aftertax salvage value from this sale if the tax rate is 35 percent?
69.
Bruno’s Lunch Counter is expanding and expects operating cash flows of
$29,000 a year for 4 years as a result. This expansion requires $39,000 in
new fixed assets. These assets will be worthless at the end of the project.
In addition, the project requires $3,000 of net working capital throughout
the life of the project. What is the net present value of this expansion
project at a required rate of return of 15 percent?
70.
Jasper Metals is considering installing a new molding machine which is
expected to produce operating cash flows of $73,000 a year for 7 years. At
the beginning of the project, inventory will decrease by $16,000, accounts
receivables will increase by $21,000, and accounts payable will increase by
$15,000. All net working capital will be recovered at the end of the project.
The initial cost of the molding machine is $249,000. The equipment will be
depreciated straight-line to a zero book value over the life of the project.
The equipment will be salvaged at the end of the project creating a $48,000
aftertax cash flow. At the end of the project, net working capital will return
to its normal level. What is the net present value of this project given a
required return of 14.5 percent?
71.
A project will produce an operating cash flow of $14,600 a year for 7 years.
The initial fixed asset investment in the project will be $48,900. The net
aftertax salvage value is estimated at $12,000 and will be received during
the last year of the project’s life. What is the net present value of the
project if the required rate of return is 12 percent?
72.
Kwik ‘n Hot Dogs is considering the installation of a new computerized
pressure cooker that will cut annual operating costs by $23,000. The system
will cost $39,900 to purchase and install. This system is expected to have a
4-year life and will be depreciated to zero using straight-line depreciation.
What is the amount of the earnings before interest and taxes for this
project?
73.
Colors and More is considering replacing the equipment it uses to produce
crayons. The equipment would cost $1.37 million, have a 12-year life, and
lower manufacturing costs by an estimated $310,000 a year. The equipment
will be depreciated using straight-line depreciation to a book value of zero.
The required rate of return is 15 percent and the tax rate is 35 percent.
What is the net income from this proposed project?
74.
Gateway Communications is considering a project with an initial fixed asset
cost of $2.46 million which will be depreciated straight-line to a zero book
value over the 10-year life of the project. At the end of the project the
equipment will be sold for an estimated $300,000. The project will not
directly produce any sales but will reduce operating costs by $725,000 a
year. The tax rate is 35 percent. The project will require $45,000 of
inventory which will be recouped when the project ends. Should this project
be implemented if the firm requires a 14 percent rate of return? Why or why
not?
75.
You are working on a bid to build two city parks a year for the next three
years. This project requires the purchase of $185,000 of equipment that will
be depreciated using straight-line depreciation to a zero book value over the
3-year project life. The equipment can be sold at the end of the project for
$34,000. You will also need $20,000 in net working capital for the duration
of the project. The fixed costs will be $18,000 a year and the variable costs
will be $168,000 per park. Your required rate of return is 15 percent and
your tax rate is 34 percent. What is the minimal amount you should bid per
park? (Round your answer to the nearest $100)
76.
You are working on a bid to build two apartment buildings a year for the
next 5 years for a local college. This project requires the purchase of
$750,000 of equipment that will be depreciated using straight-line
depreciation to a zero book value over the project’s life. The equipment can
be sold at the end of the project for $325,000. You will also need $140,000
in net working capital over the life of the project. The fixed costs will be
$628,000 a year and the variable costs will be $1,298,000 per building. Your
required rate of return is 14.5 percent for this project and your tax rate is 35
percent. What is the minimal amount, rounded to the nearest $100, you
should bid per building?
