A new project will generate sales of $74 million, costs of $42 million, and depreciation expense of

Question:

A new project will generate sales of $74 million, costs of $42 million, and depreciation expense of $10 million in the coming year. The firm’s tax rate is 30%. In Section 9.3, we described three methods for dealing with depreciation. Calculate cash flow for the year using:

a. Method 1: Dollars in minus dollars out.

b. Method 2: Adjusted accounting profits.

c. Method 3: Add back depreciation tax shield.

d. If the discount rate is 12%, what is the present value of the depreciation tax shield?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...

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