ch 10 solution - 1. The $5 million acquisition cost of the...

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1. The $5 million acquisition cost of the land six years ago is a sunk cost. The $5.3 million current aftertax value of the land is an opportunity cost if the land is used rather than sold off. The $11.6 million cash outlay and $425,000 grading expenses are the initial fixed asset investments needed to get the project going. Therefore, the proper year zero cash flow to use in evaluating this project is $5,300,000 + 11,600,000 + 425,000 = $17,325,000 2. Sales due solely to the new product line are: 19,000($12,000) = $228,000,000 Increased sales of the motor home line occur because of the new product line introduction; thus: 4,500($45,000) = $202,500,000 in new sales is relevant. Erosion of luxury motor coach sales is also due to the new mid-size campers; thus: 900($85,000) = $76,500,000 loss in sales is relevant. The net sales figure to use in evaluating the new line is thus: $228,000,000 + 202,500,000 – 76,500,000 = $354,000,000 4. To find the OCF, we need to complete the income statement as follows: Sales $ 876,400 Costs 547,300 Depreciation 128,000 EBT $ 201,100 Taxes@34% 68,374 Net income $ 132,726 The OCF for the company is: OCF = EBIT + Depreciation – Taxes OCF = $201,100 + 128,000 – 68,374 OCF = $260,726 The depreciation tax shield is the depreciation times the tax rate, so: Depreciation tax shield = t c Depreciation Depreciation tax shield = .34($128,000) Depreciation tax shield = $43,520 The depreciation tax shield shows us the increase in OCF by being able to expense depreciation. 5.
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ch 10 solution - 1. The $5 million acquisition cost of the...

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