Corrine Company owns a warehouse that it no longer needs in its own operations. The warehouse was built, at a cost of $270,000, 10 years ago, at which time its estimated useful life was 15 years. There are two proposals for the use of the warehouse: 1. Rent it at $72,000 per year, which includes estimated costs of $27,000 per year for maintenance, heat, and utilities to be paid by the lessor. 2. Sell it outright to a prospective buyer who has offered $225,000. Any capital gain would be taxed at the 30 percent rate.
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a. Calculate the after tax income if (1) Corrie Company keeps the warehouse and (2) if Corrie Company sells the warehouse.
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- There is unused space in the factory. This space can either be rented to another business for $20,000 per year or used to manufacture a new product. The new product would require an investment of $856,000 in equipment and $145,000 in working capital, the latter can be liquidated at the end of the product lifecycle, eight years in the future. The salvage value for the equipment at the end of 8-years is estimated at $58,000. The equipment will be placed in the 20% CCA asset pool. According to market research, 35,000 units of the product can be sold each year. The unit selling price is $55.00, its unit variable cost is $35.00, and fixed costs total $450,000 per year. These figures will remain unchanged throughout the product's life cycle. The corporate income tax rate is 35% and its cost of capital is 14%. The decision is being made before the 2019 tax year. Calculate the project's NPV using the six-step approach. Would you recommend approval for the project? 1) Initial investment…The Ajax Specialty Items Corporation has received a 5-year contract to produce a new product. To do the necessary machining operations, the company is considering two alternatives. Alternative A involves continued use of the currently owned lathe. The lathe was purchased 5 years ago for $20,000. Today the lathe is worth $8,000 on the used machinery market. If this lathe is to be used, special attachments must be purchased at a cost of $3,500. At the end of the 5-year contract, the lathe (with attachments) can be sold for $2,000. Operating and maintenance costs will be $7,000/year if the old lathe is used. Alternative B is to sell the currently owned lathe and buy a new lathe at a cost of $25,000. At the end of the 5-year contract, the new lathe will have a salvage value of $13,000. Operating and maintenance costs will be $4,000/year for the new lathe. Using an annual worth analysis, should the firm use the currently owned lathe or buy a new lathe? Base your analysis on a minimum…Simon Machine Tools Company is considering the purchase of a new set ofmachine tools to process special orders over the next three years. The following financial information is available:1. Without the project, the company expects to have a taxable income of$400,000 each year from its regular business over the next three years. 2. This three-year project requires the purchase of a new set of machine tools at a cost of $50,000. The equipment falls into the MACRS three-year class. The tools will be sold at the end of the project life for $10,000. The project will bring in additional annual revenue of $90,000, but it is expected to incur additional annual operating costs of $25,000.(a) What are the additional taxable incomes (from undertaking the project)during years 1 through 3, respectively?(b) What arc the additional income taxes (from undertaking the new orders) during years 1 through 3, respectively?
- Jayco, Inc. would like to set up a new plant. Currently, Jayco has the opportunity to buy an existing building at a cost of $240,000. The building falls into a MACRS 39-year class, with depreciation rates of 1.3% in Year 1, 2.6% in each of Years 2-39, and 1.3% in Year 40. Necessary equipment for the plant will cost $150,000, including installation costs. The equipment falls into a MACRS 5-year class. Depreciation rates for this class are 20%, 32%, 19%, 12%, 11%, and 6%. The project would also require an initial investment of $50,000 in net working capital. The initial working capital investment would also be made at the beginning of the project’s life, that is, in Year 0. The project's estimated economic life is four years. At the end of that time, the building is expected to have a market value of $100,000, whereas the equipment would have a market value of $20,000. The production department has estimated that variable manufacturing costs would total 60% of sales and that fixed…Freida Company is considering an asset replacement project ofreplacing a control device. This old control device has been fullydepreciated but can be sold for $5,000. The new control device, whichis more automated, will cost $42,000. The new device’s installation andshipping costs will total $16,000. The new device will be depreciatedon a straight-line basis over its 2-year economic life to an estimatedsalvage value of $0. The actual salvage value of this device at the endof 2-year period (That is, the market value of the device at the end of2-year period) is estimated to be $4,000. If the replacement project is accepted, Freida will require an initial working capital investment of$2,200 (that is, adding $2,200 initially to its net working capital).During the 1st year of operations, Freida expects its annual revenue toincrease from $72,800 to $90,000. After the 1st year, revenues fromthe replacement are expected to increase at a rate of $2,800 a year forthe remainder of the project…Freida Company is considering an asset replacement project ofreplacing a control device. This old control device has been fullydepreciated but can be sold for $5,000. The new control device, whichis more automated, will cost $42,000. The new device’s installation andshipping costs will total $16,000. The new device will be depreciatedon a straight-line basis over its 2-year economic life to an estimatedsalvage value of $0. The actual salvage value of this device at the endof 2-year period (That is, the market value of the device at the end of2-year period) is estimated to be $4,000. If the replacement project is accepted, Freida will require an initial working capital investment of$2,200 (that is, adding $2,200 initially to its net working capital).During the 1st year of operations, Freida expects its annual revenue toincrease from $72,800 to $90,000. After the 1st year, revenues fromthe replacement are expected to increase at a rate of $2,800 a year forthe remainder of the project…
- A local delivery company has purchased adelivery truck for $15,000. The truck will be depreciated under MACRS as five-year property. Thetruck’s market value (salvage value) is expectedto decrease by $2,500 per year. It is expected thatthe purchase of the truck will increase its revenueby $10,000 annually. The O&M costs are expectedto be $3,000 per year. The firm is in the 40% taxbracket, and its MARR is 15%. If the company plansto keep the truck for only two years, what would bethe equivalent present worth?2. FiTch, Inc., has purchased a new server and must decide what to do with the old one. The cost of the old server was originally P60,000 and has been depreciated P45,000. The company has received two offers. One offer was to lease the equipment for P7,000 for the next five years, but the company will be required to provide maintenance and insurance totaling P3,000 per year. The other offer was made to purchase the equipment outright for P18,500 less a 5% sales commission. Which offer should FiTCh, Inc., accept? Prepare a differential analysis report to support your answer.Mwasalat Company wants to renovate one of its existing buses at cost of OMR 200,000 and the Company will incur a repair cost of OMR 20,000 at the end of 3rd year from now. If these costs are incurred, the bus will be useful for 6 years. After a 6-year period, it will be sold at a salvage value of OMR 30,000. The total annual revenues of the bus will be OMR 260,000 and the total cost to operate the bus will be OMR 170,000 per year. Alternatively, Mwasalat Company can purchase a new bus for OMR 190,000. The new bus will require some repairs at the end of the 6-year period at a cost of OMR15,000. Its salvage value will be OMR 40,000 after its useful life of 6 years. The total annual revenues of the new bus will be OMR 220,000 and its operating cost will be OMR 130,000 per year. The company’s required rate of return is 15% before taxes. A)Should Mwasalat Company renovate the old bus or purchase a new bus? Justify your answer. B)Would the above decision of Mwasalat Company will change if…
- GoHigher is planning to purchase a machine that will cost $24,000. It has a six-year life with no salvage value. GoHigher expects to sell the machine's output of 3,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below. Sales . $90,000 Costs: Manufacturing... Depreciation on machine. Selling and administrative expenses. Income before taxes .. Income tax (50%). $52,000 4,000 30,000 (86.000) $ 4,000 ( 2,000) $ 2,000 Net income. What is GoHigher's payback period for this machine? 24 years. 1 year. 4 years. 12 years. 6 years.Agranary has two options for a conveyor used in the manufacture of grain for transporting, filling, or emptying One conveyor can be purchased and installed for $80,000 with $2,500 salvage value after 16 years. The other can be purchased and installed for $105,000 with $2,500 salvage value after 16 years. Operation and maintenance for each is expected to be $17,500 and $11,500 per year, respectively. The granary uses MACRS-GDS depreciation, has a marginal tax rate of 25%, and has a MARR of 9% after taxes. Click here to access the TVM Factor Table Calculator Click here to access the MACRS-GDS table. Part a Determine which alternative is less costly, based upon comparison of after-tax annual worth Alternative 1 Show the AW values used to make your decision: Alternative 2 Conveyor 1:$ Conveyor 2:$ Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is t10A manufacturer of aerospace products purchased four flexible assembly cells for $530,000 each. Delivery and insurance charges were $39,000, and installation of the cells cost another $50,000. a. Determine the cost basis of the four cells. b. What is the class life of the cells? c. What is the MACRS depreciation in year four? d. If the cells are sold to another company for $150,000 each at the end of year seven, how much is the recaptured depreciation?