173PS2W07

173PS2W07 - Economics 173 Corporate Finance Prof. Garey...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Economics 173 – Corporate Finance Winter 2006-07 Prof. Garey Ramey Problem Set 2 Problem 2.1. Calculate the cost in PV terms of the following equipment purchases. In each case assume the tax rate is 35%. a. Original cost of $125,000, depreciated straight-line to an ending book value of $25,000 at the end of year 5, scrapped at the end of year 5, zero scrap value. Projected inflation rate is zero, OCC is 12%. b. Original cost of $2 million, depreciated using the five-year tax depreciation schedule (p. 128 of textbook) to an ending book value of zero, scrapped for $250,000 at the end of year 8. Projected inflation rate is zero, OCC is 7%. c. Original cost of $750,000, depreciated straight-line to an ending book value of $150,000 at the end of year 3, scrapped for $60,000 at the end of year 5, scrap price expressed in today’s dollars. Projected inflation rate is 4%, OCC is 13%. Problem 2.2. Snootjoy Wines is considering the purchase of an automatic winepress for $160,000. The press will be operated for six years, after which it will be scrapped. At the end of year 6 a scrap value of $20,000 will be received. Further, a major overhaul of the winepress will be required at the end of year 3, at a cost of $10,000. For tax purposes, 20% of the initial investment may be depreciated in each year for years 1 through 4, and 10% in years 5 and 6. The overhaul costs may be treated as a current expense. The tax rate is 35% and the OCC is 9%. What is the net cost of this equipment in PV terms? Problem 2.3. Sunset Properties, Inc., is considering investing $250 million in land that it will hold for 25 years and then resell. The investment generates pretax net cash flows of $40 million per year, expressed in today’s prices. Land prices are expected to rise at the rate of 7% per year. The OCC is 13%, the projected inflation rate is 2%, and the tax rate is 45%. What is the NPV of this investment? Problem 2.4.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 3

173PS2W07 - Economics 173 Corporate Finance Prof. Garey...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online