B 72950 c 78950 d 86925 256 278 cso 2e1c los 2e1c

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b. $72,950. c. $78,950. d. $86,925.
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256 278. CSO: 2E1c LOS: 2E1c Fuller Industries is considering a $1 million investment in stamping equipment to produce a new product. The equipment is expected to last nine years, produce revenue of $700,000 per year, and have related cash expenses of $450,000 per year. At the end of the 9th year, the equipment is expected to have a salvage value of $100,000 and cost $50,000 to remove. The IRS categorizes this as 5-year Modified Accelerated Cost Recovery System (MACRS) property subject to the following depreciation rates. Year Rate 1 20.00% 2 32.00% 3 19.20% 4 11.52% 5 11.52% 6 5.76% Fuller’s effective income tax rate is 40% and Fuller expects, on an overall company basis, to continue to be profitable and have significant taxable income. If Fuller uses the net present value method to analyze investments, what is the expected net tax impact on cash flow in Year 2 before discounting? a. Tax benefit of $28,000. b. $0. c. Negative $100,000. d. Negative $128,000. 279. CSO: 2E2a LOS: 2E2a The net present value of an investment project represents the a. total actual cash inflows minus the total actual cash outflows. b. excess of the discounted cash inflows over the discounted cash outflows. c. total after-tax cash flow including the tax shield from depreciation. d. cumulative accounting profit over the life of the project.
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257 280. CSO: 2E2a LOS: 2E2b Kunkle Products is analyzing whether or not to invest in equipment to manufacture a new product. The equipment will cost $1 million, is expected to last 10 years, and will be depreciated on a straight-line basis for both financial reporting and tax purposes. Kunkle’s effective tax rate is 40%, and its hurdle rate is 14%. Other information concerning the project is as follows. Sales per year = 10,000 units Selling price = $100 per unit Variable cost = $70 per unit A 10% reduction in variable costs would result in the net present value increasing by approximately a. $156.000. b. $219,000. c. $365,000. d. $367,000. 281. CSO: 2E2a LOS: 2E2b Allstar Company invests in a project with expected cash inflows of $9,000 per year for four years. All cash flows occur at year-end. The required return on investment is 9%. If the project generates a net present value (NPV) of $3,000, what is the amount of the initial investment in the project? a. $11,253. b. $13,236. c. $26,160. d. $29,160.
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258 282. CSO: 2E2a LOS: 2E2b Smithco is considering the acquisition of scanning equipment to mechanize its procurement process. The equipment will require extensive testing and debugging, as well as user training prior to its operational use. Projected after-tax cash flows are shown below. Time Period After-Tax Cash Year Inflow/(Outflow) 0 $(550,000) 1 $(500,000) 2 $450,000 3 $350,000 4 $350,000 5 $350,000 Management anticipates the equipment will be sold at the beginning of year 6 for $50,000 when its book value is zero. Smithco’s internal hurdle and effective tax rates are 14% and 40%, respectively. The project’s net present value would be a. $(1,780).
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