additional practice problems for test number 3

additional practice problems for test number 3 - What is...

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1. ABC is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight line method over 3 years. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's operating cash flow during Year 1? Equipment cost (depreciable basis) \$150,000 Straight line depreciation rate 33.33% Sales \$120,000 Operating costs excl. depr’n \$50,000 Tax rate 35% Sales 120,000 - Operating Costs 50,000 - Depreciation Amount 50,000 EBIT 20,000 X (1-Tax Rate) .65 13,000 + Depreciation 50,000 Operating Cash Flow 63,000

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2. Smith Corp. is considering a new project whose data are shown below. The equipment that would be used has a 5-year tax life, after which it will be worthless, and it will be depreciated by the straight line method over 5 years. Revenues and other operating costs are expected to be constant over the project's 3-year life.
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Unformatted text preview: What is the project's operating cash flow during Year 1? Equipment cost (depreciable basis) \$750,000 Straight line depreciation rate 20% Sales \$600,000 Operating costs excl. depr’n \$250,000 Tax rate 35% Sales 600,000-Operating Costs 250,000-Depreciation Amount 150,000 EBIT 200,000 X (1-Tax Rate) .65 130,000 + Depreciation 150,000 Operating Cash Flow 280,000 3. XYZ is now in the final year of a project. The equipment originally cost \$20 million, of which 50% has been depreciated. Big Air can sell the used equipment today for \$6 million, and its tax rate is 40%. What is the equipment’s after-tax net salvage value? Market Value \$6 mil Less: Book Value 5 mil (20 mil x 25% which is % not Yet depreciated) Salvage Value 1 mil Tax Rate .40 Taxes 400,000 After-tax Salvage value \$600,000(1 million pretax salvage value – 400,000 taxes)...
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