Assignment 6 prb 1-11 - finance

Assume a corporation has earnings before depreciation and taxes of $121,000, depreciation of $49,000, and that it has a 40 percent tax bracket.

a.

Compute its cash flow using the following format. (Input all answers as positive values.)  

  Earnings before depreciation and taxes

$   

  Depreciation

  Earnings before taxes

$   

  Taxes

  Earnings after taxes

$   

  Depreciation

  Cash flow

$   

b.

How much would cash flow be if there were only $13,000 in depreciation? All other factors are the same.  

  Cash flow

$   

c.

How much cash flow is lost due to the reduced depreciation from $49,000 to $13,000?  

  Cash flow lost

$   

The Short-Line Railroad is considering a $195,000 investment in either of two companies. The cash flows are as follows:

Year

Electric Co.

Water Works

1

$

90,000  

$

50,000  

2

55,000  

55,000  

3

50,000  

90,000  

4 – 10

20,000  

20,000  

a.

Compute the payback period for both companies. (Round your answers to 1 decimal place.)

Payback Period

  Electric Co.

 years  

  Water Works

 years  

b.

Which of the investments is superior from the information provided?

X-treme Vitamin Company is considering two investments, both of which cost $44,000. The cash flows are as follows:

Year

Project A

Project B

1

$

46,000

$

38,000

2

17,000

18,000

3

13,000

15,000

Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a-1.

Calculate the payback period for Project A and Project B. (Round your answers to 2 decimal places.)

Payback Period

  Project A

 year(s)  

  Project B

 year(s)  

a-2.

Which of the two projects should be chosen based on the payback method?

b-1.

Calculate the net present value for Project A and Project B. Assume a cost of capital of 8 percent.(Do not round intermediate calculations and round your final answers to 2 decimal places.)

Net Present Value

  Project A

$   

  Project B

$   

b-2.

Which of the two projects should be chosen based on the net present value method?

c.

Should a firm normally have more confidence in the payback method or the net present value method?

You buy a new piece of equipment for $20,767, and you receive a cash inflow of $2,900 per year for 12 years. Use Appendix D for an approximate answer but calculate your final answer using the financial calculator method.

What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

  Internal rate of return

 %  

Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $32,000. The annual cash inflows for the next three years will be:

Year

Cash Flow

1

$

16,000

2

14,000

3

9,000

Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the financial calculator method.

a.

Determine the internal rate of return.  (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

  Internal rate of return

 %  

b.

With a cost of capital of 10 percent, should the equipment be purchased?

The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $57,000. The annual cash flows have the following projections. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year

Cash Flow

1

$ 22,000  

2

24,000  

3

26,000  

4

32,000  

5

14,000  

a.

If the cost of capital is 11 percent, what is the net present value of selecting a new machine? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

  Net present value

$   

b.

What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

   Internal rate of return

 % 

c.

Should the project be accepted?

Turner Video will invest $88,500 in a project. The firm’s cost of capital is 10 percent. The investment will provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year

Inflow

1

$ 30,000  

2

32,000  

3

36,000  

4

40,000  

5

44,000  

The internal rate of return is 28 percent.

a.

If the reinvestment assumption of the net present value method is used, what will be the total value of the inflows after five years? (Assume the inflows come at the end of each year.) (Do not round intermediate calculations and round your answer to 2 decimal places.)

  Total value of inflows

$   

b.

If the reinvestment assumption of the internal rate of return method is used, what will be the total value of the inflows after five years? (Use the given internal rate of return. Do not round intermediate calculations and round your answer to 2 decimal places.)

  Total value of inflows

$   

c.

Which investment assumption is better?

Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix Bfor an approximate answer but calculate your final answer using the formula and financial calculator methods.

Project E

Project H

($33,000 investment)

($33,000 investment)

Year

Cash Flow

Year

Cash Flow

1

$ 8,000    

1

$ 15,000    

2

11,000    

2

17,000    

3

17,000    

3

16,000    

4

19,000    

a.

Determine the net present value of the projects based on a zero percent discount rate.

Net Present Value

  Project E

 $   

  Project H

 $   

b.

Determine the net present value of the projects based on a discount rate of 12 percent. (Do not round intermediate calculations and round your answers to 2 decimal places.)

Net Present Value

  Project E

 $   

  Project H

 $   

c.

If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 12 percent?

Telstar Communications is going to purchase an asset for $300,000 that will produce $140,000 per year for the next four years in earnings before depreciation and taxes. The asset will be depreciated using the three-year MACRS depreciation schedule in Table 12–12. (This represents four years of depreciation based on the half-year convention.) The firm is in a 35 percent tax bracket.

Fill in the schedule below for the next four years. (Input all amounts as positive values. Round your answers to the nearest whole dollar amount.)

Year 1

Year 2

Year 3

Year 4

  Earnings before depreciation and taxes

$

$

$

$

  Depreciation

  Earnings before taxes

$

$

$

$

  Taxes

  Earnings after taxes

$

$

$

$

  Depreciation

  Cash flow

$

$

$

$

The Summitt Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $450,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years: Use Table 12-12.

Year 1

$

200,000  

Year 2

263,000  

Year 3

90,000  

Year 4

80,000  

The firm is in a 30 percent tax bracket and has a cost of capital of 12 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a.

Calculate the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

  Net present value

$   

b.

Under the net present value method, should Summitt Petroleum Corporation purchase the asset?

An asset was purchased three years ago for $175,000. It falls into the five-year category for MACRS depreciation. The firm is in a 30 percent tax bracket. Use Table 12–12.

a.

Compute the tax loss on the sale and the related tax benefit if the asset is sold now for $20,560. (Input all amounts as positive values. Do not round intermediate calculations and round your answers to whole dollars.)

  Tax loss on the sale

$   

  Tax benefit

$   

b.

Compute the gain and related tax on the sale if the asset is sold now for $67,060. (Input all amounts as positive values. Do not round intermediate calculations and round your answers to whole dollars.)

  Taxable gain

$   

  Tax obligation

$