Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered...
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Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $400,000. Of this sum, $50,000 is described by the supplier as an installation cost. Ms. Potts does not know whether the Internal Revenue Service (IRS) will permit the company to treat this cost as a tax-deductible current expense or as a capital investment. In the latter case, the company could depreciate the $50,000 straight-line over 5 years. The tax rate is 30% and the opportunity cost of capital is 5%. a. What is the present value of the cost of the kiln if the installation cost is treated as a separate current expense? b. What is the present value of the cost of the kiln if the installation cost is treated as a part of the capital investment? Tubby Toys estimates that its new line of rubber ducks will generate sales of $7 million, operating costs of $4 million, and a depreciation expense of $1 million. If the tax rate is 25%, what is the firm's operating cash flow? Problem 9-7 Calculating Cash Flows (LO2) The owner of a bicycle repair shop forecasts revenues of $160,000 a year. Variable costs will be $50,000, and rental costs for the shop are $30,000 a year. Depreciation on the repair tools will be $10,000. a. Prepare an income statement for the shop based on these estimates. The tax rate is 20%. INCOME STATEMENT 0 $ 0 b. Calculate the operating cash flow for the repair shop using the three methods given below: i. Dollars in minus dollars out. ii. Adjusted accounting profits. iii. Add back depreciation tax shield. Methods of Calculation i. Dollars in minus dollars out Operating Cash flow ii. Adjusted Accounting profits iii. Add back depreciation tax shield Problem 9-14 Project Evaluation (LO2) Revenues generated by a new fad product are forecast as follows: Year 1 2 3 Revenues $ 40,000 30,000 4 Thereafter 20,000 10,000 0 Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $45,000 in plant and equipment. Required: a. What is the initial investment in the product? Remember working capital. b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm's tax rate is 40%, what are the project cash flows in each year? c. If the opportunity cost of capital is 12%, what is project NPV? d. What is project IRR? Complete this question by entering your answers in the tabs below. Req A Req B Req C and D What is the initial investment in the product? Remember working capital. Initial investment < Req A Req B > Ms. T. Potts, the treasurer of Ideal China, has a problem. The company has just ordered a new kiln for $400,000. Of this sum, $50,000 is described by the supplier as an installation cost. Ms. Potts does not know whether the Internal Revenue Service (IRS) will permit the company to treat this cost as a tax-deductible current expense or as a capital investment. In the latter case, the company could depreciate the $50,000 straight-line over 5 years. The tax rate is 30% and the opportunity cost of capital is 5%. a. What is the present value of the cost of the kiln if the installation cost is treated as a separate current expense? b. What is the present value of the cost of the kiln if the installation cost is treated as a part of the capital investment? Tubby Toys estimates that its new line of rubber ducks will generate sales of $7 million, operating costs of $4 million, and a depreciation expense of $1 million. If the tax rate is 25%, what is the firm's operating cash flow? Problem 9-7 Calculating Cash Flows (LO2) The owner of a bicycle repair shop forecasts revenues of $160,000 a year. Variable costs will be $50,000, and rental costs for the shop are $30,000 a year. Depreciation on the repair tools will be $10,000. a. Prepare an income statement for the shop based on these estimates. The tax rate is 20%. INCOME STATEMENT 0 $ 0 b. Calculate the operating cash flow for the repair shop using the three methods given below: i. Dollars in minus dollars out. ii. Adjusted accounting profits. iii. Add back depreciation tax shield. Methods of Calculation i. Dollars in minus dollars out Operating Cash flow ii. Adjusted Accounting profits iii. Add back depreciation tax shield Problem 9-14 Project Evaluation (LO2) Revenues generated by a new fad product are forecast as follows: Year 1 2 3 Revenues $ 40,000 30,000 4 Thereafter 20,000 10,000 0 Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $45,000 in plant and equipment. Required: a. What is the initial investment in the product? Remember working capital. b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm's tax rate is 40%, what are the project cash flows in each year? c. If the opportunity cost of capital is 12%, what is project NPV? d. What is project IRR? Complete this question by entering your answers in the tabs below. Req A Req B Req C and D What is the initial investment in the product? Remember working capital. Initial investment < Req A Req B >
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Related Book For
Principles of Corporate Finance
ISBN: 978-0072869460
7th edition
Authors: Richard A. Brealey, Stewart C. Myers
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