Jamie's Motor Home Sales currently sells 1,000 Class A motor homes, 2,500 Class C motor homes, and 4,000 popup 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 popups 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 popups sell for $5,000 each. The new midrange 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 5year 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. Shortterm debt is expected to increase by $100,000 and longterm debt is expected to increase by $300,000. The project has a 5year life. The fixed assets
will be depreciated straightline 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 aftertax cash flow from the sale of the fixed assets at the end of this project?
(Round your answer to whole dollars.)
Aftertax salvage value = .25 × $325,000 × (1  .35) = $52,812.50 = $52,813 (rounded)
Thornley Machines is considering a 3year 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 straightline 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
0
= $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 5year property for MACRS. The equipment cost $67,600. What will the book value of this equipment be at the end of
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 Spring '11
 Zhu
 Finance, Depreciation, Net Present Value

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