1.Tank Ltd is considering undertaking the purchase of a new piece of equipment that is expected to increase pre-tax income (EBITDA) by $15,000 each year for the next 4 years. It costs $35,000 to purchase today and for tax purposes must be depreciated down to zero over its 5 year useful life using the straight-line method. If Tank is actually forecasting a salvage (for capital budgeting purposes) of $9,000 after 4 years, what is the machine's net cash flow (after tax) for year 4? Assume the tax rate is 30%.
NB: EBITDA is "Earnings Before Interest, Taxes, Depreciation and Amortisation"
2.Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $5.92 million to setup and will generate $20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $12 million during this year and depreciation expense will be another $3 million. THSI will require no working capital for this investment. THSI's marginal tax rate is 35%.
Assume that THSI's cost of capital is 14% p.a.
Compute the NPV of the temporary housing facility to the nearest dollar. (Do not enter a dollar sign, just enter your answer as a whole number, either positive or negative)
The after tax cash flow is... View the full answer