FINANCIAL MANAGEMENT #6

BCN 3753 FINANCIAL MANAGEMENT OF CONSTRUCTION ORGANIZATIONS

Spring 2015 - Homework Assignment #6 (50 Points)

Due Date: April 7, 2015 – 5:00 PM

(**Note: The information provided in each problem is sufficient to solve the problem

independent of your answers to the other problems)

Important Submission Instructions:

1. In class students should submit homework assignments in class (hard copy). The answers to all the questions should be turned in together (stapled) – Only students

who are absent are allowed to submit their homework on Blackboard

2. For submissions on Blackboard (FEEDS students), the answers to all the questions should be saved and submitted in a SINGLE PDF file. Otherwise, the HW will not be

graded.

1. (25 points)You purchase equipment for $200,000 and it costs $15,000 to have it delivered and

installed. Based on past information, you believe that you can sell the equipment for $20,000

when you are done with it in 7 years. The company’s marginal tax rate is 40% and the capital

gain tax rate is 15%. If you use sum-of-years depreciation method and the required return

(MARR) on this project is 8%:

a. What is the present value of the CCA tax shield?

b. What is the present value of the tax that you will pay on the capital gain from selling

the equipment?

2. (15 points) A construction company’s net income/loss for the first five years of the company’s

existence is as follows; If the company’s marginal tax rate is 40%, what is the income tax for

the corporation after carrying forward any losses from the years

a. Year 1: -$20,000

b. Year 2: -$25,000

c. Year 3: $30,000

d. Year 4: $40,000

e. Year 5: $30,000

3. (10 points) Elaborate three impacts of income tax considerations on the financial decisions of

construction firms.