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finance_mngmt_chap10

finance_mngmt_chap10 - Chapter 10 Making Capital Investment...

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Chapter 10: Making Capital Investment Decisions Problem : Summer Tyme, Inc., is considering a new 6-year expansion project that requires an initial fixed asset investment of $2.214 million. The fixed asset will be depreciated straight-line to zero over its 6-year tax life, after which time it will be worthless. The project is estimated to generate $1,968,000 in annual sales, with costs of $787,200. If the tax rate is 34 percent, the OCF for this project is $ ______ Answer : Using the tax shield approach to calculating OCF (Remember the approach is irrelevant; the final answer will be the same no matter which of the four methods you use.), we get: OCF = (Sales − Costs)(1 − t C ) + t C Depreciation OCF = ($1,968,000 − 787,200)(1 − .34) + .34($2,214,000/6) OCF = $904,788 Problem : Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.618 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will be worthless. The project is estimated to
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finance_mngmt_chap10 - Chapter 10 Making Capital Investment...

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