The following information relates to the next three problems: Your company is co
ID: 2798278 • Letter: T
Question
The following information relates to the next three problems:
Your company is considering a machine which will cost $50,000 at Time 0 and which can be sold after 3 years for $10,000. $12,000 must be invested at Time 0 in inventories and receivables; these funds will be recovered when the operation is closed at the end of Year 3. The facility will produce sales revenues of $50,000/year for 3 years; variable operating costs (excluding depreciation) will be 40 percent of sales. No fixed costs will be incurred. Operating cash inflows will begin 1 year from today. By an act of Congress, the machine will have depreciation expenses of $40,000, $5,000, and $5,000 in Years 1, 2, and 3 respectively. The company has a 40 percent tax rate, enough taxable income from other assets to enable it to get a tax refund on this project if the project's income is negative, and a 15 percent cost of capital. Inflation is zero.
18. What is the depreciation tax shield dollar amount for the second operating year?
a. $ 5,000
b. $ 2,000
c. $ 3,000
d. $13,333
e. $ 5,333
19. What’s the company’s operating cash flow for year one?
a. $ 50,000
B. $ 34,000
c. $-10,000
d. $ - 6,000
e. None of the above
20. What’s the firm’s total net cash flow for the project’s final year that would be used in determining the project’s NPV?
a. $ 7,673.71
b. $15,000
c. $18,000
d. $20,000
e. $38,000
Explanation / Answer
18. Depreciation tax shield= Depreciation * tax rate= 5000*40%= 2000
Option b. is correct
19.
Option. b is correct
20.
Option e. is correct
Sales 50000 Less: costs 20000 Less: depreciation 40000 Loss -10000 Less:Tax shield -4000 Net loss -6000 Add: Depreciation 40000 Net cash flow 34000Related Questions
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