The minimum annual rate of return after tax 14 Income tax rate federal and

The minimum annual rate of return after tax 14 income

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The minimum annual rate of return (after-tax) 14% Income tax rate (federal and state) 40% Requirements 1. Show how you would handle the individual items in determining whether the co or convert it to a factory outlet. 2. After analyzing all relevant data, compute the net present value. Indicate which should be taken. Solution 1. NPV analysis worksheet (note: PV factors are calculated directly and are Tables 1 and 2): Item and Description PV a. After-tax rent foregone (\$128,931) b. All are irrelevant c. Remodeling cost (capitalized) (\$100,000) Depreciation tax savings (DDB method; @40%) \$30,111 d. Investment in net working capital (\$600,000) e. Recovery of net working capital \$311,621 f. After-tax cash sales \$1,853,864 After-tax cash perating expenses (\$1,029,924) g. After-tax sales promotion cost, year 0 (\$60,000) h. After-tax termination cost, year 5 (\$15,581) NPV = \$261,160 former that provides an automatic switch to the SL method when it is ad factory outlet. The NPV from converting the facility into a factory outlet is also b (see item b). Note: the advantage of using the VDB function in Excel, rather than the DDB f 2. The positive NPV, \$261,160 , suggests that, compared to the leasing alternative

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nalysis of the best use of a warehouse the company owns. a year-to-year basis, for \$5,000 per month. The warehouse's s likely to remain unchanged in the near future. The building et book value (NBV) is \$7,500. Lewisville Company is . The remodeling will cost \$100,000 and will be modest l be depreciated over the next five years using the double- e \$600,000. This total is fully recoverable whenever ew highway. The company most likely would receive f depreciation, are: Sales, \$900,000; Operating Expenses, pected to be \$100,000. Non-recurring termination costs at desired is 14%. The company is in the 40% tax bracket. actors using the following formula, for i = 1, 5: e depreciation charges. ) The inventory and receivables
ompany should continue to lease the space h course of action, based only on these data, therefore slightly different from those presented in Appendix C, CASH FLOWS IN YEAR (in '000s) 0 1 2 3 4 5 \$36,000 \$36,000 \$36,000 \$36,000 \$36,000 (\$100,000) \$16,000 \$9,600 \$5,760 \$4,320 \$4,320 (\$600,000) \$600,000 \$540,000 \$540,000 \$540,000 \$540,000 \$540,000 (\$300,000) (\$300,000) (\$300,000) (\$300,000) (\$300,000) (\$60,000) (\$30,000) dvantageous to do so. better than the alternative of selling the warehouse for \$200,000 function, is that there is a (default) option in the e, it is financially advantageous to convert the facility into a

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Exercise 12-44: Machine Replacement with Tax Considerations; Sprea Background A computer chip manufacturer spent \$2,500,000 to develop a special-purpose m machine has been used for one year, and will be obsolete after an additional thre uses straight-line (SL) depreciation for this machine. At the beginning of the second year, a machine salesperson offers a new, vas machine. It will cost \$2,000,000, willl reduce annual cash manufacturing costs fro \$1,000,000, and will have zero disposal value at the end of three years. Manage use the double-declining-balance depreciation method for tax purposes for this m useful to use the VDB function in Excel to calculate depreciation charges.) The old machine's salvage value is \$300,000 now and will be \$50,000 three y no salvage value is provided in calculating straight-line (SL) depreciation for tax income-tax rate is 45%. The company desires to earn a minimum after-tax rate o
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