1. MARBLE LANE, Inc. is looking at a project that will cost $550,000 and last 5
ID: 2677188 • Letter: 1
Question
1. MARBLE LANE, Inc. is looking at a project that will cost $550,000 and last 5 years. A first analysis used straight line depreciation, but if $200,000 was recognized in year 1 as the depreciation expense, what would be the effect on the Operating Cash Flow for Year 1 if the tax rate is 40%?2. MARBLE LANE, Inc. now thinks that it can realize a pre-tax salvage value of $90,000 when the project is over in 5 years. With a tax rate of 40% and a required return on 15%, what is the effect of this on the project
Explanation / Answer
solutin: A) effect on the Operating Cash Flow for Year 1 if the tax rate is 40%? we know that.... SLN Dep = 550,000/5 = 110,000 pa Dep improves CF. So Due to Dep of $200,000, an addl 200,000-110,000 = 90000 amt is being claimed as Dep. So addl Post Tax CF will be 90,000*40% = 36000. ans B) Dep of $200,000, Op CF will increase by $36,000 .Post Tax salvage value is 90000*(1-40%) = 54000. This is addl CF Disc rate is 15% & term is 5 Yrs So PV of Salvage value = 54000/(1+15%)^5 = $26,848 So Proj NAV will increase by $26,848. c) ) Net wkg cap infused at start of project will be rcovered at end of proj. . PV of 50,000 rxd at end of 5 Yrs with 15% disc rate is 50000/(1+15%)^5 = $24,859 So Net CF = -50,000+ $24,859 = -$25,141 So Proj NAV will get reduced by - $25,141 d) Sales 600,000 Less Cost 50% ($300,000) Less Dep ($110,000) ------------------------- PBT 190,000 Less Tax 40% ($76,000) --------------------------- PAT 114,000 Add Back Dep $110,000
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