Fairfax Pizza is evaluating a project that would require an initial investment i

Question

Fairfax Pizza is evaluating a project that would require an initial investment in equipment of 400,000 dollars and that is expected to last for 8 years. MACRS depreciation would be used where the depreciation rates in years 1, 2, 3, and 4 are 40 percent, 31 percent, 20 percent, and 9 percent, respectively. For each year of the project, Fairfax Pizza expects relevant, incremental annual revenue associated with the project to be 584,000 dollars and relevant, incremental annual costs associated with the project to be 484,000 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?

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Thank you for your time .. Can you please answer this one as well?

Middlefield Motors is evaluating project A, which would require the purchase of a piece of equipment for 319,000 dollars. During year 1, project A is expected to have relevant revenue of 154,000 dollars, relevant costs of 58,000 dollars, and some depreciation. Middlefield Motors would need to borrow 319,000 dollars for the equipment and would need to make an interest payment of 15,950 dollars to the bank in year 1. Relevant net income for project A in year 1 is expected to be 23,000 dollars and operating cash flows for project A in year 1 are expected to be 67,000 dollars. Straight-line depreciation would be used. 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.

Explanation / Answer

*Dep for yr 4 = (400000-40%-31%-20%-9%)

Feel free to ask any doubt in comments.. Please provide feedback.. Thanks in advance... :-)

Year 1 Year 4 Income Statement (x) (y) Incremental revanue 584000 584000 less: Incremental Cost 484000 484000 Less: Depreciation 160000 *11923.2 EBIT -60000 88076.8 less; tax 50% 0 44038.4 Net income -60000 44038.4 Add: Depreciation 160000 11923.2 ocf 100000 55961.6 x + y 155961.6 Year 1 Income Statement (x) Incremental revanue 154000 less: Incremental Cost 58000 Less: Depreciation Bal. Fig. 44000 Less: Interest 15950 EBIT 36050 less; tax 13050 Net income 23000 Add: Depreciation Bal. Fig. 44000 ocf 67000 Tax Rate= 13050/36050 0.361997

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