w equipment will not change ding depreciation of 250000 sts per year for

W equipment will not change ding depreciation of

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w equipment will not change ding depreciation) of $250,000 sts per year for additional sales. n of 14% after-tax for all effects will the new ars? umption that cash flows occur evenly throughout the year. e reliability of some of the following two equipment increase and nerate an after-tax IRR of believes that, in w much can the firm decrease se of the new equipment? $1,950,000 $90 $45 $135 not apply.
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10,000 $1,350,000 $600,000 $100,000 $200,000 $300,000 $300,000 ($90,000) $210,000 Years 1 to 3 Year 4 $210,000 $210,000 $200,000 $200,000 $0 $195,000 $410,000 $605,000 ch of the first three years and alue. Therefore, there is no are as follows:
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ment. D32) -tax increase in variable costs n $315,078.
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) ove). On a per-unit basis, for all s: $154,465 20,000 units $7.72 3.96% share, achievement by competitors of y by Nil Hill to cross-sell products the abandonment option included icipated lower prices by competitors? ment? me? s yield or PPM defects)? d this space best be used to
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Pr. 12-56: Sensitivity Analysis; Equipment Replacement De Background The Mendoza Company discussed in the chapter is now considerin equipment that the company uses to monitor the integrity of metal p drilling purposes. The company's pre-tax WACC is estimated as 12 are pertinent to the question you've been asked to analyze: Information Annual (pre-tax) variable operating expenses Current purchase price Current salvage value Current book value of existing asset Expected useful life (years) Expected salvage value in 6 years Cost of capital (WACC) = After-tax WACC = Combined (federal and state) tax rate = Requirements 1. What is the maximum amount of annual variable operating expe would make this an attractive investment from a present-value s 2. Assume now that the company expects, over the coming six yea a combined income-tax rate of 40%, including any gains or loss sale of equipment. Assume that the current book value of the ex $50,000 and that the after-tax WACC for Mendoza is 10.0%. Finally, assume that the company uses SL depreciation, with no costs that can be incurred in order to make the proposed purcha present-value sense? 3. What strategic considerations might affect the decision whether equipment? Solution 1. Net investment outlay, time 0 = $460,000 Differential salvage value, e-o-y 6 = $90,000 Annual pre-tax operating expenses, existing asset = income-tax purposes. In this situation, what is the maximum var
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PV (@ 12%) of salvage differential, from year 6 = Net investment outlay - PV of salvage differential = 1 0.8928571 2 0.7971939 3 0.711780 4 0.6355181 5 0.5674269 6 0.5066311 annuity factor = 4.1114073 = $414,403 ÷ 4.1114073 = Therefore, maximum annual operating cost, new asset Combined (federal and state) income tax rate = After-tax WACC (discount rate) = Net pre-tax investment outlay, time 0 = Tax effect of loss on sale of existing asset = Net-of-tax initial investment outlay, time 0 = Differential salvage value, e-o-y 6 = Tax effect on differential salvage values = Net-of-tax differential salvage value, e-o-y 6 = Differential tax shield, depreciation deductions: Annual tax shield, existing asset = Annual tax shield, replacement asset = PV of differential depreciation tax shield (@10%) = Annual pre-tax operating expenses, existing asset = Annual post-tax operating expenses, existing asset = 1 0.9090909 2 0.8264463 Year PV Factor (@ 12%) PV of annuity = annuity amount × annuity factor annuity amount = PV of annuity ÷ annuity factor = $200,000
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