FIN254 Assignment#8 (Based on Chapter 10)

1. Consider the following income statement: Sales 876400 Costs 547300 Depreciation 1 8!000 "#$% & %a'es (34)* & +et $ncome & ,ill in the missing n-m.ers and calc-late /C,. 0hat is the depreciation ta' shield& . S-ppose 1o- are considering a pro2ect that has forecasted sales of 346000! Costs of 344000 and depreciation of 34500. %he ta' rate is 35). Calc-late operating cash flow in fo-r methods disc-ssed in the chapter (5int: the answer sho-ld .e the same for each one*. 3. S-ppose! an asset costs 3468!000 and is depreciated in straight line o6er to 7ero in eight 1ears of -sef-l life. %he asset is to .e -sed in a 5 1ear pro2ect. 8fter the pro2ect is finished the asset can .e sold for 37 000. $f the rele6ant ta' is 35)! what is the after ta' cash flow from the sale of the asset& 4. Samata 9eather is considering a new three 1ear e'pansion pro2ect that needs an initial fi'ed asset in6estment of 34. million. %he fi'ed asset will .e depreciated straight line to 7ero o6er its three 1ear ta' life. 8fter that! it will .e -seless. %he pro2ect is estimated to generate 33!100!000 in ann-al sales! with costs of 3440!000. $f the ta' rate is 35)! what is the /C, for the pro2ect& 5.$n the pre6io-s pro.lem! if the re:-ired ret-rn is 1 )! what is the pro2ects +;<& 6. $n the pre6io-s pro.lem! s-ppose the pro2ect re:-ires an initial in6estment in +0C of 3300!000 and the fi'ed asset will ha6e a mar=et 6al-e of 3 10!000 at the end of the pro2ect. 0hat is the pro2ects 1ear 0 net cash flow& >ear 1& >ear & >ear 3& 0hat is the new +;<& 7. ;hoeni' 9eather is loo=ing at a new leather processing s1stem with an installed cost of 3500!000. %his cost will .e depreciated straight line to 7ero o6er the pro2ects fi6e 1ear life! at the end of which the s1stem can .e scrapped for 380000. %he s1stem will sa6e the firm 3150!000 per 1ear in preta' operating costs and the s1stem re:-ires an initial in6estment in net wor=ing capital of 350000. $f the ta' rate is 35) and the re:-ired ret-rn is 11). 0hat is the +;< of the pro2ect& Sho-ld we accept the pro2ect .ased on +;<& 8. >o-r compan1 is planning the p-rchase of a new 31!000!000 comp-ter?.ased order entr1 s1stem. %he s1stem will .e depreciated straight?line to 7ero o6er its fi6e?1ear life. $t will .e worth 3100!000 at the end of that time. >o- will sa6e 3380!000 .efore ta'es per 1ear in order processing costs and 1o- will .e a.le to red-ce wor=ing capital .1 3150!000 (one time red-ction*. $f the ta' rate is 35)! what is the $@@ for the pro2ect& 4. $n the pre6io-s pro.lem! s-ppose 1o-r re:-ired ret-rn on the pro2ect is 0) and 1o-r preta' cost sa6ings are 3400!000 per 1ear. 0ill 1o- accept the pro2ect& 0hat if the preta' cost sa6ings are 33 0!000 per 1ear& 8t what le6el of preta' cost sa6ings wo-ld 1o- .e indifferent .etween accepting the pro2ect and re2ecting it&

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