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
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
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
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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