1.Consider an asset that costs $616,000 and is depreciated straight-line to zero

Question

1.Consider an asset that costs $616,000 and is depreciated straight-line to zero over its seven-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $183,000. If the relevant tax rate is 34 percent, what is the aftertax cash flow from the sale of this asset? (Do not round intermediate calculations.)

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2. Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.73 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,090,000 in annual sales, with costs of $785,000. The project requires an initial investment in net working capital of $310,000, and the fixed asset will have a market value of $215,000 at the end of the project. If the tax rate is 30 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign.)

If the required return is 13 percent, what is the project's NPV? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

3.Consider the following two mutually exclusive projects:

What is the payback period for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

4. A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows:

If the required return is 15 percent, what is the IRR for this project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

5.

A project that provides annual cash flows of $18,000 for ten years costs $86,000 today.

What is the NPV for the project if the required return is 9 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

At a required return of 9 percent, should the firm accept this project?

What is the NPV for the project if the required return is 21 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

At a required return of 21 percent, should the firm accept this project?

At what discount rate would you be indifferent between accepting the project and rejecting it? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

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Explanation / Answer

1.Consider an asset that costs $616,000 and is depreciated straight-line to zero over its seven-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $183,000. If the relevant tax rate is 34 percent, what is the aftertax cash flow from the sale of this asset? (Do not round intermediate calculations.)

Annual Depreciation = 616000/7 = $ 88000

Accumulated Depreciation till 5 Year = 88000*5 = $ 440000

Book Value at the end of 5 Year = Total cost - Accumulated Depreciation

Book Value at the end of 5 Year = 616000 - 440000

Book Value at the end of 5 Year = $ 176000

Sale Value = 183000

Capital Gain On Sale = Sale Value - Book Value

Capital Gain On Sale = 183000 - 176000

Capital Gain On Sale = $ 7000

Tax on Capital Gain On Sale = 7000*34% = $ 2380

Aftertax salvage value = Sale value - Tax on Capital Gain On Sale

Aftertax salvage value = 183000 - 2380

Aftertax salvage value = $ 180620

Answer

Aftertax salvage value = $ 180620

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