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Unformatted text preview: Jamie's Motor Home Sales currently sells 1,000 Class A motor homes, 2,500 Class C motor homes, and 4,000 pop-up trailers each year. Jamie is considering adding a mid- range camper and expects that if she does so she can sell 1,500 of them. However, if the new camper is added, Jamie expects that her Class A sales will decline to 950 units while the Class C campers decline to 2,200. The sales of pop-ups will not be affected. Class A motor homes sell for an average of $125,000 each. Class C homes are priced at $39,500 and the pop-ups sell for $5,000 each. The new mid-range camper will sell for $47,900. What is the erosion cost? Erosion cost = [(1,000 - 950) × $125,000] + [(2,500 - 2,200) × $39,500] = $18,100,000 You just purchased some equipment that is classified as 5-year property for MACRS. The equipment cost $67,600. What will the book value of this equipment be at the end of three years should you decide to resell the equipment at that point in time? Year 1= 20, yr2= 30, yr3= 19.20 Book value at the end of year 3 = $67,600 - [$67,600 × (.20 + .32 + .192)] = $19,468.80 Margarite's Enterprises is considering a new project. The project will require $325,000 for new fixed assets, $160,000 for additional inventory and $35,000 for additional accounts receivable. Short-term debt is expected to increase by $100,000 and long-term debt is expected to increase by $300,000. The project has a 5-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 25% of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $554,000 and costs of $430,000. The tax rate is 35% and the required rate of return is 15%. What is the amount of the after-tax cash flow from the sale of the fixed assets at the end of this project? (Round your answer to whole dollars.) After-tax salvage value = .25 × $325,000 × (1 - .35) = $52,812.50 = $52,813 (rounded) Thornley Machines is considering a 3-year project with an initial cost of $618,000. The project will not directly produce any sales but will reduce operating costs by $265,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $60,000. The tax rate is 34%. The project will require $23,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a 9% rate of return? Why or why not? CF = -$618,000 + (-$23,000) = -$641,000 Annual depreciation = $618,000 ÷ 3 = $206,000 Taxes = ($265,000 - $206,000) × .34 = $20,060 OCF = $265,000 - $20,060 = $244,940 C0 3 = $244,940 + [$60,000 × (1 - .34)] + $23,000 = $307,540 You just purchased some equipment that is classified as 5-year property for MACRS. The equipment cost $67,600. What will the book value of this equipment be at the end ofYou just purchased some equipment that is classified as 5-year property for MACRS....
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This note was uploaded on 06/29/2011 for the course FIN 322 taught by Professor Zhu during the Spring '11 term at Oakland University.
- Spring '11