Suppose that Sudbury Mechanical Drifters is proposing to invest $10.8 million in a new factory. It can depreciate this investmentstraight-line over 10 years. The tax rate is 35%, and the discount rate is 10%.a. What is the present value of Sudbury's depreciation tax shields? (Enter your answers in millions rounded to 1 decimal place.)TotalYear 10Year 9Year 8Year 7Year 6Year 5Year 4Year 3Year 2Year 1Straight-line Schedule$ 10.8$1.1$1.1$1.1$1.1$1.1$1.1$1.1$$1.1Straight-line, 10-year$1.11.1$0.4$0.4 $0.40.4$$0.40.4 $0.4$$$0.4$0.40.4Tax Shields at 35% TcPV (Tax Shields) at 10%b. Suppose that the government allows companies to use double-declining-balance depreciation with the option to switch at any pointto straight-line. Now what is the present value of the depreciation tax shields? (Enter your answers in millions rounded to 1 decimalplace.)TotalYear 10Year 9Year 8Year 7Year 6Year 5Year 4Year 3Year 2Year 1Double decline Schedule$9.7$10.8Start of Year Book ValueDepreciationTax Shields at 35% TcPV (Tax Shields) at 10%EAEA

Part (a)Annual depreciation rate under straight line method = 1 / useful life = 1/10 = 10%Hence,…

Answered: Suppose that Sudbury Mechanical…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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What will be the annual cash outflows for Mimi Inc. if it leased a milling machine for $8, 200 per year for 5 years. Assume that the new machine cost $ 42,000 and will depreciate on a straight line basis over the 5 years and that Mimi has a tax rate of 32 percent. Question 15Select one: a. - $5,576 b. $42,000 C. -$8,264 d. $33,800 e. - $2,688
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Question 1) Imagine you are considering buying a gold deposit. It will cost $1 million per year to construct a mine so that gold can be extracted. The construction period lasts 3 years. In the fourth year, production starts. Each year the mine operates it will yield a net return of $500,000 (total revenue minus total cost). What will you pay for the gold deposit if: (a) Interest rates are 10 percent and gold can be extracted for 10 years? (b) Interest rates are 5 percent and gold can be extracted for 6 years?
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