Nickel Industries is considering the purchase of a new machine that will cost $1

Question

Nickel Industries is considering the purchase of a new machine that will cost $178,000, plus an additional $12,000 to ship and install. The new machine will have a 5 year useful life and will be depreciated using the straight line method. The machine is expected to generate new sales of $85,000 per year and is expected to increase operating costs by $ 10,000 annually. Nickel’s income tax rate is 40%. What is the projected incremental cash flow of the machine or year 1? (Points : 1)
$54,800
$60,200
$66,350
$68,200
A corporate bond has a face value of $1,000 and a coupon rate of 6.5%. The bond matures in 10 years and has a current market price of $985. If the corporation sells more bonds it will incur flotation costs of $36 per bond. If the corporate tax rate is 34 %, what is the after tax cost of debt capital? (Points : 1)
5.71%
5.45%
5.18%
4.78%

Explanation / Answer

Total Cost of M/C = 178000+12000=190,000 Dep using SLN method for 5 yrs = 190000/5 =38000 Sales Rev pa = 85000 Less Op cost = -10000 Less Dep = -38000 ----------------------- Inc Bef Tax = 37000 Less Tax 40% = -14800 ------------------------- Inc after tax = 22200 Add back Dep=38000 -------------------------- Net CF = 60200.........................Ans To get the after-tax rate, you simply multiply the before-tax rate by one minus the marginal tax rate (before-tax rate x (1-marginal tax)). Therefore, since the question asks for the after-tax cost of debt, the paragraph regarding thefloataion costs etc is extra information. The after tax-rate of the debt will be =6.5%*(1 - 34%) =6.5%*(66%) =4.29%

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