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A project is expected to increase a firm’s sales revenue by $12,000 annually, de

ID: 2719253 • Letter: A

Question

A project is expected to increase a firm’s sales revenue by $12,000 annually, decrease it cash expenses by $18,000 annually, and increase its depreciation by $10,000 annually. Given this information, what is the project’s expected annual net cash flow? Use a 40% effective tax rate.

   $400

   $12,000

   $22,000

   $18,000

A capital budgeting project is expected to have the following cash flows:

Year    Cash Flows

0          -$1,000,000

1          $400,000

2          $400,000

3          $200,000

4          $400,000

What is the project’s internal rate of return?

   16.00%

   8.99%

   21.86%

   15.54%

A capital budgeting project is expected to have the following cash flows:

Year    Cash Flows

0          -$850,000

1          $300,000

2          $400,000

3          $500,000

What is the project’s net present value at an 18% required rate of return?

   -$4,173.50

   $10,800.96

   -$18,725.33

   $350,000.00

Luther’s Famous Barbeque has estimated the following cost of debt (before-tax) and cost of equity.

Proportion of Debt       Before-tax Cost of Debt      Cost of Equity

30%                                 7.0%                                11.1%

40%                                 7.3%                                11.9%

50%                                 8.4%                                13.7%

What is the cost of capital at Luther’s optimal capital structure given the above information and a 40% effective tax rate?

   8.71%

   8.89%

   9.03%

   9.37%

Explanation / Answer

Solution:


Therefore, the answer to the abive question is $ 22,000

Increase in sales Revenue          12,000 Add: Savings in cash expense          18,000 Less: Increase in depreciation          10,000 Annual incremental income before tax          20,000 Less: Tax Expense - 40 %            8,000 Income after tax          12,000 Add: Depreciation          10,000 Annual Cashflow          22,000
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