35) Stanley Company has obtained the following information about a proposed project: Annual cash operating savings (excluding
Question:
Annual cash operating savings (excluding depreciation)
for 5 years (end of year)$50,000
Depreciation expense per year for tax purposes$33,000
Estimated salvage value in 5 years$10,000
Cost of equipment$175,000
Required rate of return10%
Income tax rate40%
Estimated useful life (in years)5
Depreciation method for tax purposes Straight-line
Present value of ordinary annuity of one
at 10% for 5 periods 3.7908
Present value of one at 10% for 5 periods 0.6209
Required:
A) What is the NPV of the project?
B) Should the project be undertaken?
36) Jesse Company has obtained the following data about a possible planned investment:
Cost $300,000
Terminal salvage value in 10 years0
Annual cash operating savings excluding depreciation
for 10 years (end of year) $50,000
Estimated useful life in years10
Minimum desired rate of return10%
Present value of ordinary annuity, 10%, 10 periods6.1446
Present value of one, 10%, 10 periods 0.3855
Income tax rate40%
The company uses the straight-line depreciation method for taxes.
Required:
A) Compute the net present value of the investment.
B) Compute the net present value of the investment if the terminal salvage value is estimated to be $50,000 in 10 years.
11.6 Questions
1) A five-year MACRS asset that cost $50,000 was sold at the end of its useful life for $20,000. The book value of the asset at the time of sale was $0. The asset had no expected terminal value. The tax rate is 20%. What is the net after-tax cash effect from the sale of the asset?
A) $16,000 cash inflow
B) $16,000 cash outflow
C) $24,000 cash inflow
D) $24,000 cash outflow
2) A plant asset with a book value of $40,000 is sold for $10,000. The applicable tax rate is 20%. The net after-tax cash effect of the sale is a ________.
A) $6,000 cash inflow
B) $10,000 cash inflow
C) $16,000 cash inflow
D) $16,000 cash outflow
3) A plant asset with a book value of $50,000 is sold for $40,000. The applicable tax rate is 50%. What is the tax effect of the loss on sale?
A) $5,000 cash outflow
B) $5,000 cash inflow
C) $20,000 cash inflow
D) $25,000 cash inflow
4) A plant asset with a book value of $320,000 is sold for $560,000. The tax rate is 20%. What is the net after-tax cash inflow resulting from this sale?
A) $144,000
B) $512,000
C) $560,000
D) $656,000
5) A plant asset with a book value of $320,000 is sold for $400,000. The tax rate is 20%. What is the tax effect of the gain on sale?
A) $16,000 cash outflow
B) $16,000 cash inflow
C) $64,000 cash inflow
D) $80,000 cash inflow
6) A plant asset with a book value of $160,000 is sold for $100,000. The applicable tax rate is 20%. What is the net after-tax cash inflow resulting from the sale?
A) $12,000 cash inflow
B) $88,000 cash inflow
C) $100,000 cash inflow
D) $112,000 cash inflow