FI 311 Connect homework #12

# FI 311 Connect homework #12 - Connect 12 1 Kelly's Corner...

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Connect 12 1) Kelly's Corner Bakery purchased a lot in Oil City five years ago at a cost of \$610,000. Today, that lot has a market value of \$750,000. At the time of the purchase, the company spent \$54,000 to level the lot and another \$4,700 to install storm drains. The company now wants to build a new facility on that site. The building cost is estimated at \$1,090,000. What amount should be used as the initial cash flow for this project? \$-1,754,000 \$-1,840,000 \$-1,090,000 \$-1,700,000 \$-1,894,000 CF 0 = -\$750,000 – \$1,090,000 = -\$1,840,000 2) Jefferson & Sons is evaluating a project that will increase annual sales by \$90,000 and annual costs by \$35,000. The project will initially require \$145,000 in fixed assets that will be depreciated straight-line to a zero book value over the 10 year life of the project. The applicable tax rate is 34 percent. What is the operating cash flow for this project? \$26,730 \$40,500 \$730 \$41,230 \$36,300 OCF = (\$90,000 – \$35,000) (1 – 0.34) + (\$145,000/10) (0.34) = \$41,230 3) Bernie's Beverages purchased some fixed assets classified as 5-year property for MACRS. The assets cost \$25,000. What will the accumulated depreciation be at the end of year three? MACRS 5-year property Year Rate 1 20.00% 2 32.00% 3 19.20% 4 11.52% 5 11.52% 6 5.76% \$13,000 \$21,075 \$5,000 \$17,800

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\$2,880 Depreciation = \$25,000 x (0.20 + 0.32 + 0.192) = \$17,800 4) Edward's Manufactured Homes purchased some machinery 2 years ago for \$47,000. The assets are classified as 5-year property for MACRS. The company is replacing this machinery today with newer machines that utilize the latest in technology. The old machines are being sold for \$17,000 to a foreign firm for use in its production facility in South America. What is the aftertax salvage value from this sale if the tax rate is 34 percent? MACRS 5-year property Year Rate 1 20.00% 2 32.00% 3 19.20% 4 11.52% 5 11.52% 6 5.76% \$15,822.24 \$17,895.44 \$22,560.00 \$18,890.40 \$17,000.00 Book value 2 = \$47,000 x (1 – 0.20 – 0.32) = \$22,560.00 Tax on sale = (\$17,000 – \$22,560.00) x .34 = -\$1,890.40 Aftertax cash flow = \$17,000 + \$1,890.40 = \$18,890.40 5) Champion Bakers uses specialized ovens to bake its bread. One oven costs \$860,000 and lasts
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