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In-Class Case Quiz_Solutions_11Spring

In-Class Case Quiz_Solutions_11Spring - company's tax rate...

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F301 Spring 2011 F301 Spring 2011 Capital Budgeting Quiz 1. Three years ago, a company purchased a new computer server for \$40,000. It is being depreciated straight-line to zero over six years (it is halfway through its depreciable life). Now, at the end of the third year, it is being sold for \$22,000. The applicable tax rate is 38%. What is the after-tax cash flow from the sale? 2. From the following information, compute OCF. Sales revenue 180,000 Variable operating costs (140,000) Salaries, general expenses (30,000) Depreciation (6,000) Interest expense (8,000) Income before tax (4,000) Tax rate 39% 3. Using the 7-year MACRS depreciation schedule, the percent factor for the first year of depreciation is 14.29%. Suppose an asset was purchased for \$50,000, and the
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Unformatted text preview: company's tax rate is 40%. To compute OCF using the tax shield method, what would be the value of the depreciation tax shield which would be shown as a cash inflow in the first year? That is, how many dollars of tax are saved as a result of the depreciation expense? 4. From the following information, compute total cash flow from assets in Year 4 (the terminal year). Assume the appropriate tax rate is 39%. Time Zero Year 1 Year 2 Year 3 Year 4 OCF 10,000 11,000 11,500 12,000 Change in NWC (5,000) (2,000) (2,000) (3,000) ? Capital Spending (after tax) (25,000) 8,000 What is the total cash flow from assets?...
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