8400000 8400000 8400000 8400000 Increase in income before taxes 4848000 6288000

8400000 8400000 8400000 8400000 increase in income

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(8,400,000) (8,400,000) (8,400,000) (8,400,000) Increase in income before taxes $4,848,000 $6,288,000 $7,728,000 $9,168,000 $10,608,000 $12,048,000 $13,488,000 Less Income Taxes @ 30% (1,454,400) (1,886,400) (2,318,400) (2,750,400) (3,182,400) (3,614,400) (4,046,400) Increase in NI from investment $3,393,600 $4,401,600 $5,409,600 $6,417,600 $7,425,600 $8,433,600 $9,441,600 Add back depreciation 8,400,000 8,400,000 8,400,000 8,400,000 8,400,000 8,400,000 8,400,000 Increase in cash flow $11,793,600 $12,801,600 $13,809,600 $14,817,600 $15,825,600 $16,833,600 $17,841,600 Terminal Disposal Value (New) $14,400,000 Less tax on disposal gain @ 30% (4,320,000) After-tax cash inflow from terminal $10,080,000 Total Cash Flow ($56,280,000) $11,793,600 $12,801,600 $13,809,600 $14,817,600 $15,825,600 $16,833,600 $27,921,600 PV Table Values 0.89286 0.79719 0.71178 0.63552 0.56743 0.50663 0.45235 NPV of cash inflows $70,120,220 $10,530,000 $10,205,357 $9,829,401 $9,416,853 $8,979,870 $8,528,426 $12,630,314 2. NPV of Replacement Alternative $13,840,220 NPV Special Function Feature $70,120,220 2. NPV of Replacement Alternative $13,840,220 3. Suppose Pro Chips is planning to build several more plants. It wants to have the most advantageous tax position possible. Pro Chips has been approached by Spain, Malaysia, and Australia to construct plants in their countries. Use the data in Problem 21-27 and this problem to briefly describe in qualitative terms the income tax features that would be advantageous to Pro Chips. Pro Chips would prefer to: a. Have lower tax rates b. Have revenue exempt from taxation c. Recognize taxable revenues in later years rather than earlier years d. Recognize taxable cost deductions greater than actual outlay costs, and e. Recognize cost deductions in earlier years rather than later years (including accelerated amounts in earlier years).
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Problem 21-32 Equipment Replacement, income taxes, sensitivity. (CMA adapted). Given: WRL Company operates a snack food center at the Hartsfield Airport. On January 1, 2003, WRL purchased a special cookie-cutting machine, which has been used for three years. It is January 1, 2006, and WRL is considering whether it should purchase a new, more-efficient cookie-cutting machine. WRL has two options: (1) continue using the old machine or (2) sell the old machine and purchase a new machine. The seller of the new machine isn't offering a trade-in. The following information has been obtained: Old Machine New Machine Initial purchase cost of machine $80,000 $120,000 Useful life from acquisition date (in years) 7 4 Terminal disposal value at the end of the useful life on 12/31/2009 assumed for depreciation purposes $10,000 $20,000 Expected annual cash operating costs: Variable cost per cookie $0.200 $0.140 Total fixed costs $15,000 $14,000 Depreciation method for tax purposes Straight-line Straight-line Estimated disposal value of machines: January 1, 2006 $40,000 $120,000 December 31, 2009 $7,000 $20,000 Expected number of cookies made and sold each year 300,000 300,000 WRL is subject to a 40% income tax rate. Assume that any gain or loss on the sale of machines is treated as an ordinary tax item and will affect the taxes paid by WRL in the year in which it occurs. WRL's after-tax required rate of return is 16%. Assume all cash flows occur at year-end except for initial investment amounts. 1. Use the NPV method to determine whether WRL should retain the old machine or acquire the new machine. Cash Outflow for Initial Investment Required for New Machine ($120,000.00) Cash Inflow from sale of old machine 40,000.00 a. After-tax cash inflow from tax savings on loss from sale of old machine Original cost of old machine $80,000 Less accumulated depreciation associated with old machine 30,000 Book value of old machine at time of sale $50,000
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