#13) Gomi Waste Disposal is evaluating a project that would require the purchase

Question

#13) Gomi Waste Disposal is evaluating a project that would require the purchase of a piece of equipment for 167,000 dollars today. During year 1, the project is expected to have relevant revenue of 125,000 dollars, relevant costs of 41,000 dollars, and relevant depreciation of 29,000 dollars. Gomi Waste Disposal would need to borrow 167,000 dollars today to pay for the equipment and would need to make an interest payment of 7,000 dollars to the bank in 1 year. Relevant net income for the project in year 1 is expected to be 47,669 dollars. What is the tax rate expected to be in year 1? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098. (JUST NEED THE ANSWER)

#14) Fairfax Pizza is evaluating a project that would require an initial investment in equipment of 300,000 dollars and that is expected to last for 9 years. MACRS depreciation would be used where the depreciation rates in years 1, 2, 3, and 4 are 41 percent, 32 percent, 19 percent, and 8 percent, respectively. For each year of the project, Fairfax Pizza expects relevant, incremental annual revenue associated with the project to be 468,000 dollars and relevant, incremental annual costs associated with the project to be 411,000 dollars. The tax rate is 50 percent. What is (X plus Y) if X is the relevant operating cash flow (OCF) associated with the project expected in year 1 of the project and Y is the relevant OCF associated with the project expected in year 4 of the project? (JUST NEED THE ANSWER)

Explanation / Answer

13) We are given net income which is basically post tax income. We need to compute pre tax income.

Pre-Tax Income = Revenue - Costs - Depreciation - Interest = $125,000 - $41,000 - $29,000 - $7,000 = $48,000

Tax rate = (Pre-Tax income - Post Tax Income) / Pre-Tax Income = ($48,000 - $47,669) / $48,000 = 0.00689583333 or 0.0069

14) Depreciation in Year 1 = $300,000 x 41% = $123,000

Depreciation in Year 4 = $300,000 x 8% = $24,000

Operating Cash Inflows = (Incremental Revenue - Incremental Cost) x (1 - Tax rate) + Depreciation x Tax rate

Year 1 (X) = ($468,000 - $411,000) x (1 - 0.50) + $123,000 x 0.50 = $90,000

Year 4 (Y) = ($468,000 - $411,000) x (1 - 0.50) + $24,000 x 0.50 = $40,500

X + Y = $90,000 + $40,500 = $130,500

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