1. The J. Harris Corporation is considering selling one of its old assembly mach
ID: 2651946 • Letter: 1
Question
1. The J. Harris Corporation is considering selling one of its old assembly machines. The machine purchased for $60,000 6 years ago, had an expected lif of 15 years and and expected salvage value of zero. Assume Harris used simplified straight –line depreciation ( depreciation of $4,000 per year) and could sell this old machine for $56,000. Aslo assume Harris has a 33% marginal tax rate.
a.What would be the taxes associated with this sale?
b. If the old machine were sold for $46,000, what would be the taxes associated with this sale?
c. If the old machine were sold for $36,000 , what would be the taxes associated with this sale?
d. If the old machine were sold for $33,000, what would be the taxes associated with this sale?
2. Assume that a new project will annually generate revenues $2,200,000. Cash expenses including both fixed and variable costs will be $700,000, and depreciation will increase by $ 22,000 per year. In addition, let’s assume that the firm’s marginal tax rate is 34%. Calculate the operating cash flows.
3. You are considering new elliptical trainers and you feel you can sell 3,000 of these per year for 5 years (after which time this project is expected to shut down when it is learned that being fit is unhealthy). The elliptical trainers would sell for $1,500 each and have a variable cost of $750 each. The annual fixed costs associated with production would he $1,100,000. In addition there would be a $3,000,000 initial expenditure associated with the purchase of new production equipment. It is assumed that this initial expenditure will be depreciated using the simplified straight-line method down to zero over 5 years. This project will also require a one-time initial investment of $1,300,000 in net working capital associated with inventory, and that working capital investment will he recovered when the project is shut down. Finally, assume That the firms marginal rate is 34 percent.
a. What is initial outlay associated with this project?
b. What are the annual free cash flows associated with this project for years I through 4?
c. What is the terminal cash flow in year 5 (that is, what is the free cash flow in year 5 plus any additional cash flows associated with the termination of the project)?
d. What is the projects NPV given a required rate of return of 12 percent?
Explanation / Answer
1. The J. Harris Corporation is considering selling one of its old assembly machines. The machine purchased for $60,000 6 years ago, had an expected lif of 15 years and and expected salvage value of zero. Assume Harris used simplified straight –line depreciation ( depreciation of $4,000 per year) and could sell this old machine for $56,000. Aslo assume Harris has a 33% marginal tax rate.
a.What would be the taxes associated with this sale?
Book Value of Machine at present = Actual Cost - Accumulated Depreciation
Book Value of Machine at present = 60000 - 4000*6
Book Value of Machine at present = 36000
Taxes associated with this sale = (Sale Value - Book Value )*tax rate
Taxes associated with this sale = (56000 - 36000)*33%
Taxes associated with this sale = $ 6600
b. If the old machine were sold for $46,000, what would be the taxes associated with this sale?
Book Value of Machine at present = Actual Cost - Accumulated Depreciation
Book Value of Machine at present = 60000 - 4000*6
Book Value of Machine at present = 36000
Taxes associated with this sale = (Sale Value - Book Value )*tax rate
Taxes associated with this sale = (56000 - 46000)*33%
Taxes associated with this sale = $ 3300
c. If the old machine were sold for $36,000 , what would be the taxes associated with this sale?
Book Value of Machine at present = Actual Cost - Accumulated Depreciation
Book Value of Machine at present = 60000 - 4000*6
Book Value of Machine at present = 36000
Taxes associated with this sale = (Sale Value - Book Value )*tax rate
Taxes associated with this sale = (36000 - 36000)*33%
Taxes associated with this sale = $ 0
d. If the old machine were sold for $33,000, what would be the taxes associated with this sale?
Book Value of Machine at present = Actual Cost - Accumulated Depreciation
Book Value of Machine at present = 60000 - 4000*6
Book Value of Machine at present = 36000
Taxes associated with this sale = (Sale Value - Book Value )*tax rate
Taxes associated with this sale = (33000 - 36000)*33%
Taxes associated with this sale = - $ 990
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