Investment PVdepreciation tax shield The present value of the depreciation tax

Investment pvdepreciation tax shield the present

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*Annuity discounted at 13%; number of years = project life. Investment − PV(depreciation tax shield). The present value of the depreciation tax shield for each alternative is computed as follows: The equivalent annual cost (EAC) for each alternative is computed as follows: b. Since the operating costs are the same, then Quick & Dirty is preferred because it has the lower EAC. The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $30. The unit cost of the giftware is $10. Year Unit Sales 1 39,000 2 47,000 3 16,000 4 9,000 Thereafter 0 It is expected that net working capital will amount to 30% of sales in the following year. For example, the store will need an initial (year-0) investment in working capital of .30 × 39,000 × $30 = $351,000. Plant and equipment necessary to establish the Giftware business will require an additional investment of $217,000. This investment will be depreciated using MACRS and a 3-year life. After 4 years, the equipment will have an economic and book value of zero. The firm’s tax rate is 30%. What is the net present value of the project? The discount rate is 10%. (Do not round intermediate calculations. Round your answer to the nearest dollar amount.) Net present value $ rev: 05_12_2012 Explanation: Some values below may show as rounded for display purposes, though unrounded numbers
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should be used for the actual calculations. All figures in thousands 0 1 2 3 4 Net worki ng capita l $ 351 $423 $ 144 $ 81 $ 0 Inve stmen t in NWC 351 72 −279 −63 −81 Inve stmen t in plant & equip ment 217 0 0 0 0 Cash flow from invest ment activit y $ −568 $−72 $ +279 $ +63 $ +81 All figures in thousands 0 1 2 3 4 Reven ue $ 1,170.0 0 $ 1,410.0 0 $ 480.00 $ 270.00 Cost 390.00 470.00 160.00 90.00 Depre ciation 72.30 96.50 32.10 16.08 Pretax profit 707.67 843.54 287.86 163.92 Taxes 212.30 253.06 86.36 49.18 Net income 495.37 590.48 201.50 114.74
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Depre ciation 72.33 96.46 32.14 16.08 Operat ing cash flow $567.70 $686.94 $ 233.64 $ 130.82 Total cash flow $−568 $495.70 $965.94 $ 296.64 $ 211.82 NPV = −$568 + $495.70 + $965.94 + $296.64 + $211.82 = $1,048.480, or $1,048,477 1.10 1.10 2 1.10 3 1.10 4 Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $1.3 million. The lathe will cost $48,000 per year to run, but will save the firm $141,000 in labor costs, and will be useful for 10 years. Suppose that for tax purposes, the lathe will be depreciated on a straight- line basis over its 10-year life to a salvage value of $370,000. The actual market value of the lathe at that time also will be $370,000. The discount rate is 8%, and the corporate tax rate is 35%. What is the NPV of buying the new lathe? (Negative amount should be indicated by a minus sign. Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV $ Explanation: All figures are on an incremental basis: Labor savings $ 141,000 −Operating cost 48,000 −Depreciati on 93,000 EBIT 0 −Taxes 0 Net income 0 +Depreciati on 93,000
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Operating cash flow $ 93,000 NPV = −$1,300,000 + [$93,000 × annuity factor (8%, 10 years)] + [$370,000/(1.08) 10 ] In a slow year, Deutsche Burgers will produce 2.9 million hamburgers at a total cost of $5.4 million. In a good year, it can produce 5.4 million hamburgers at a total cost of $6.1 million.
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