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fm12 16 - must be considered in the analysis If the firm's...

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Mini Case: 12 - 16 a. 3. Now assume that the plant space could be leased out to another firm at $25,000 a year. Should this be included in the analysis? If so, how? Answer: If the plant space could be leased out to another firm, then if Shrieves accepts this project, it would forgo the opportunity to receive $25,000 in annual cash flows. This represents an opportunity cost to the project, and it should be included in the analysis. Note that the opportunity cost cash flow must be net of taxes, so it would be a $25,000(1 - t) = $25,000(0.6) = $15,000 annual outflow. a. 4. Finally, assume that the new product line is expected to decrease sales of the firm’s other lines by $50,000 per year. Should this be considered in the analysis? If so, how? Answer: If a project affects the cash flows of another project, this is an "externality" which
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Unformatted text preview: must be considered in the analysis. If the firm's sales would be reduced by $50,000, then the net cash flow loss would be a cost to the project. Note that this annual loss would not be the full $50,000, because Shrieves would save on cash operating costs if its sales dropped. Note also that externalities can be positive as well as negative. b. Disregard the assumptions in part a. What is Shrieves’ depreciable basis? Answer: Get the depreciation rates from table 12-2 in the book. Note that because of the half-year convention, a 3-year project is depreciated over 4 calendar years: YEAR RATE × BASIS = DEPRECIATION 1 0.33 $240 $ 79 2 0.45 240 108 3 0.15 240 36 4 0.07 240 17 $240...
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