A company is considering purchasing a machine for $100,000. Shipping costs would be another $5,000. The project would require an initial investment in net working capital of $4,000 which would be recouped at the end of the project. What is the project’s initial outlay?
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Operating Cash Flows
A project will generate sales of $18 million. The operating costs (not including depreciation) are $9 million. The depreciation expense is $4 million. If the tax rate is 40%, what is the operating cash flow?
A project will generate sales of $150,000. The variable costs are $35,000 and the fixed costs are $40,000. The project will use an equipment worth $250,000 that will be depreciated on a straight-line basis to a zero book value over a 10-year life of the project.The interest expense is estimated to be $10,000. If the tax rate is 25%, what is the operating cash flow?
A project will generate sales of $250,000. The total cash expenses are $80,000. The project will use an equipment worth $350,000 that will be depreciated on a straight-line basis to a zero book value over a 10-year life of the project. The project will require an initial investment in net working capital is $5,000 which will be recouped at the end of the project. If the tax rate is 25%, what is the operating cash flow?
A project will generate sales of 100 units annually at a selling price of $140 each. The variable costs per unit are $35 and the fixed costs are $10,000. The project will use an equipment worth $100,000 that will be depreciated on a straight-line basis to a zero book value over a 10-year life of the project. If the tax rate is 25%, what is the operating cash flow?
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MACRS Depreciation
An equipment worth $250,000 is classified as a 7-year MACRS property. Assume a tax rate of 20%.
What is the book value of this asset at the end of years 1-8?
What is the depreciation expense in each of the years 1-8?
If the equipment can be sold for $5,000 at then end of Year 5, what is the after-tax salvage value?
If the equipment can be sold for $80,000 at then end of Year 5, what is the after-tax salvage value?
The MACRS allowance percentages for the 7-year asset class are as follows, commencing with year one: 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, and 4.46%.
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Straight-line Depreciation
A company purchased an equipment worth $250,000. It will be depreciated using the straight-line depreciation over 8 years. Assume a tax rate of 20%.
What is the book value of this asset at the end of years 1-8?
What is the depreciation expense in each of the years 1-8?
If the equipment can be sold for $5,000 at then end of Year 5, what is the after-tax salvage value?
If the equipment can be sold for $80,000 at then end of Year 5, what is the after-tax salvage value?
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After-tax Salvage Value
Suppose that ABC Company purchased $10000 of machinery 3 years ago. The machinery is 5-year MACRS property. The firm is selling this equipment today for $5000. What is the After-tax Salvage Value if the tax rate is 30%?
Suppose that ABC Company purchased $10000 of machinery 4 years ago. The machinery is 5-year MACRS property. The firm is selling this equipment today for $5000. What is the After-tax Salvage Value if the tax rate is 30%?
Suppose that ABC Company purchased $10000 of machinery 5 years ago. The machinery is 5-year MACRS property. The firm is selling this equipment today for $5000. What is the After-tax Salvage Value if the tax rate is 30%?
The MACRS allowance percentages are as follows, commencing with year one: 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, 5.76%.
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Terminal Cash Flows
Three years ago, Alton, Inc. purchased an machine for $50,000 for a project that would last for 3 years. The investment in net working capital was $1,000 which would be recovered at the end of the project. Today, the company is selling the machine for $5,000. If the book value of the machine is $10,000 today and the tax rate is 15%. What are the terminal cash flows?
NPV
A project has an initial outlay of $100,000. The project will generate annual cash flows of $18,000 over the 8-year life of the project and terminal cash flows of $7,500 in the last year of the project. If the required rate of return on the project is 10%, what is the net present value (NPV) of the project?
NPV and IRR – Comprehensive Problems
Straight-line: A new project will require an equipment worth $100,000. The installation expenses are $10,000. The project will run for five years. The depreciation is straight-line basis. The equipment will be depreciated to a zero book value at the end of the project. The project will require an initial investment in net working capital is $5,000 which will be recouped at the end of the project. The annual operating cash flow is $50,000. The equipment is expected to have a salvage value of $4,000 at the end of the project. Assume a tax rate of 25% and a cost of capital is 10%. What are the NPV and IRR of the project? Should the equipment be purchased?
MACRS: The equipment cost is $50,000 and it would cost another $10,000 to modify it. Assume that the equipment falls into the MACRS 3-year class. The equipment will be sold after 3 years for $20,000. It would require an increase in net working capital of $2,000 at the start of the project. This working capital would be recovered at the end of the project. The new project will not have an effect on revenues but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. Assume a tax rate of 40% and a cost of capital is 10%. What are the NPV and IRR of the project? Should the equipment be purchased? The MACRS allowance percentages for the 3-year asset class are as follows, commencing with year one: 33.33%, 44.45%, 14.81%, 7.41%.
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