Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 10, Problem 7QP
Calculating Salvage Value [LO1] Consider an asset that costs $730,000 and is
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6.10 Calculating Salvage Value An asset used in a 4-year project falls in the 5-year MACRS class for tax purposes. The asset has an acquisition cost of $7.6 million and will be sold for $1.4 million at the end of the project. If the tax rate is 21 percent, what is the after tax salvage value of the asset?
5. Does your company want to purchase this machine that will provide cost savings of $100,000
annually for its useful life (8 years)? The cost is $250,000; tax rate is 36% and discount rate is
14%. Compute straight-line depreciation for 8 years with zero salvage value. Calculate the cash
flows and determine the NPV and IRR. Does your company want to buy this machine?
Problem 3. Malipol Books is considering the purchase of a new binding equipment that will reduce operating costs. The cost of the equipment will be Php 70,000, which will be depreciated straight line over 5 years to a zero-salvage value. Sales are expected to increase Php 65,000 per year, with an expected cash flow earnings before depreciation and taxes/sales ratio of 60%.
What is the expected after-tax cash flows from the project if the tax rate is 40%?
Chapter 10 Solutions
Fundamentals of Corporate Finance
Ch. 10.1 - What are the relevant incremental cash flows for...Ch. 10.1 - What is the stand-alone principle?Ch. 10.2 - Prob. 10.2ACQCh. 10.2 - Prob. 10.2BCQCh. 10.2 - Explain why interest paid is not a relevant cash...Ch. 10.3 - What is the definition of project operating cash...Ch. 10.3 - For the shark attractant project, why did we add...Ch. 10.4 - Prob. 10.4ACQCh. 10.4 - How is depreciation calculated for fixed assets...Ch. 10.5 - Prob. 10.5ACQ
Ch. 10.5 - Prob. 10.5BCQCh. 10.6 - Prob. 10.6ACQCh. 10.6 - Under what circumstances do we have to worry about...Ch. 10 - Prob. 10.1CTFCh. 10 - What should NOT be included as an incremental cash...Ch. 10 - Prob. 10.3CTFCh. 10 - An asset costs 24,000 and is classified as...Ch. 10 - Prob. 10.5CTFCh. 10 - Prob. 10.6CTFCh. 10 - Opportunity Cost [LO1] In the context of capital...Ch. 10 - Depreciation [LO1] Given the choice, would a firm...Ch. 10 - Net Working Capital [LO1] In our capital budgeting...Ch. 10 - Stand-Alone Principle [LO1] Suppose a financial...Ch. 10 - Prob. 5CRCTCh. 10 - Cash Flow and Depreciation [LOI] When evaluating...Ch. 10 - Capital Budgeting Considerations [LOI] A major...Ch. 10 - Prob. 8CRCTCh. 10 - Prob. 9CRCTCh. 10 - Prob. 10CRCTCh. 10 - Relevant Cash Flows [LO1] Parker Slone, Inc., is...Ch. 10 - Prob. 2QPCh. 10 - Calculating Projected Net Income [LO1] A proposed...Ch. 10 - Calculating OCF [LO1] Consider the following...Ch. 10 - OCF from Several Approaches [LO1] A proposed new...Ch. 10 - Calculating Depreciation [LO1] A piece of newly...Ch. 10 - Calculating Salvage Value [LO1] Consider an asset...Ch. 10 - Calculating Salvage Value [LO1] An asset used in a...Ch. 10 - Calculating Project OCF [LO1] Quad Enterprises is...Ch. 10 - Calculating Project NPV [LO1] In the previous...Ch. 10 - Prob. 11QPCh. 10 - NPV and Modified ACRS [LO1] In the previous...Ch. 10 - Project Evaluation [LO1] Dog Up! Franks is looking...Ch. 10 - Project Evaluation [LO1] Your firm is...Ch. 10 - Prob. 15QPCh. 10 - Calculating EAC [LO4] A five-year project has an...Ch. 10 - Calculating EAC [LO4] You are evaluating two...Ch. 10 - Calculating a Bid Price [LO3] Romo Enterprises...Ch. 10 - Cost-Cutting Proposals [LO2] Warmack Machine Shop...Ch. 10 - Comparing Mutually Exclusive Projects [LO1] Lang...Ch. 10 - Prob. 21QPCh. 10 - Prob. 22QPCh. 10 - Prob. 23QPCh. 10 - Comparing Mutually Exclusive Projects [LO4]...Ch. 10 - Equivalent Annual Cost [LO4] Compact fluorescent...Ch. 10 - Break-Even Cost [LO2] The previous problem...Ch. 10 - Break-Even Replacement [LO2] The previous two...Ch. 10 - Issues in Capital Budgeting [LO1] The debate...Ch. 10 - Replacement Decisions [LO2] Your small remodeling...Ch. 10 - Replacement Decisions [LO2] In the previous...Ch. 10 - Calculating Project NPV [LO1] You have been hired...Ch. 10 - Prob. 32QPCh. 10 - Calculating Required Savings [LO2] A proposed...Ch. 10 - Prob. 34QPCh. 10 - Calculating a Bid Price [LO3] Your company has...Ch. 10 - Replacement Decisions [LO2] Suppose we are...Ch. 10 - Conch Republic Electronics, Part 1 Conch Republic...Ch. 10 - Conch Republic Electronics, Part 1 Conch Republic...Ch. 10 - Conch Republic Electronics, Part 1 Conch Republic...Ch. 10 - Conch Republic Electronics, Part 1 Conch Republic...
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- Mf1. Consider an asset that costs $492,800 and is depreciated straight-line to zero over its 6-year tax life. The asset is to be used in a 2-year project; at the end of the project, the asset can be sold for $61,600. If the relevant tax rate is 22 percent, what is the aftertax cash flow from the sale of this asset?arrow_forwardProject Section 1: You are considering buying an industrial equipment whose price is 445000. The equipment is expected to earn an annual revenue of $150,000. The equipment will be depreciated under MACRS as a five-year recovery property. The equipment will be used for seven years, at the end of which time, you can sell it for $50,000. Your company's marginal tax rate is 35% over the project period. Perform the following: a) Determine the net after-tax cash flows for each period over the project life. b) Net present worth assuming company MARR 15% . c) Annual equivalent cash flow company MARR 15%. = =arrow_forwardQ. A project requires an initial investment in machinery of $400,000. Additional cash inflows of $150,000 at current price levels are expected for three years, at the end of which time the machinery will be scrapped. The machinery will attract tax-allowable depreciation of 30% on the RB basis, which can be claimed against taxable profits of the current year, which is soon to end. A balancing charge or allowance will arise on disposal. The tax rate is 40% and tax is payable 50% in the current year, 50% one year in arrears. The pre-tax cost of capital is 22% and the rate of inflation is 10%. Assume that the project is 100% debt financed. Required Assess whether the project should be undertaken.arrow_forward
- [EXCEL] Investment cash flows: Zippy Corporation just purchased computing equipment for $20,000. The equipment will be depreciated using a five-year MACRS depreciation schedule. If the equipment is sold at the end of its fourth year for $12,000, what are the after-tax proceeds from the sale, assuming the marginal tax rate is 35 percent. Please use excelarrow_forwardHomer Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net Income after tax of $169,650. The equipment will have an initial cost of $585,000 and have a 5-year life. If the salvage value of the equipment is estimated to be $25,000, what is the annual net cash flow? Multiple Choice $144,650 $57,650 $281650 $194,650arrow_forwardQUESTION 1 Malone Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $46160. The equipment will have an initial cost of $154060 and have a 5-year life. The salvage value of the equipment is estimated to be $22500. Factors to use for n=5, 1 =10% (DO NOT USE ANY OTHER FACTORS OR EQUATIONS) Present Value of an Annuity of $1 3.7908 Present Value of $1 0.6209 Future Value of an Annuity of $1 6.1051 Future Value of $1 1.6105 If the hurdle rate is 10%, what is the approximate net present value? Ignore income taxes.arrow_forward
- 1 2 We are evaluating a project that costs $845,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 51,000 units per year. Price per unit is $53, variable cost per unit is $27, and fixed costs are $950,000 per year. The tax rate is 22 percent, and we require a return of 10 percent on this project. a. Calculate the accounting break-even point. What is the degree of operating leverage at the accounting break-even point? b. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the quantity sold? Explain what your answer tells you about a 500-unit decrease in the quantity sold. c. What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tells you about a $1 decrease in estimated variable costs. 3 4 Input area: 5 6 Initial cost 7 Project life 8 Units sales 9 Price/unit 10 Variable cost/unit 11 Fixed costs 12 Tax…arrow_forwardQ3. [ of SR 190,000 each year for the next 5 years. The asset has no salvage value at the end of its useful life. Assume an effective tax rate of 20%, and an after-tax MARR of 10% per year. Determine whether the asset is economically acceptable based on a present worth analysis of After Tax Cash Flow (ATCF) if a double-declining depreciation method is used. ] An asset has a purchase price of SR 800,000 and expected to realize a net revenuearrow_forwardQuestion 2: SABIRCO wants to investigate the following project. Initial investment $1,000,000 Annual income $200,000 in year 1 and increase every year by 40,000. No salvage value MARR = 10% a) What is the discounted payback period? b) Assuming the project to be used for 8 years. What is the end balance of the project at end of year 8?arrow_forward
- 10. Tam Co. is negotiating for the purchase of equipment that would cost PI00,000 with the expectation that P20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment's estimated useful life is 10 years, with no residual value and would be depreciated by the straight-line method. Tam's predetermined minimum desired rate of return is 12%. Net present value is a. P5,760 b. Рб,440 c. P12,200 d. P13,000 e. None of these; answer is 11. Refer to no. 10. Payback perlod is a. 4.0 years b. 4.4 years c. 4.5 years d. 5.0 years e. None of these; answer is 12. Refer to no. 10. Accrual accounting rate of return based on initial investment is d. 10% a 30% b, 20% с. 12% e. None of these; answer is 13. Refer to no. 10. In estimating the internal rate of retum, the factors in the table of present values of an annuity should be taken from the columns closest to c. 5.00 e. None of these; answer is a 0.65 b. 1.30 d. 5.65arrow_forwardAn investment in a certain project can be recovered in 10 years. The investment has no salvage value. If the net income before taxes from this investment is P10,000 annually and income taxes are 20% each year, how much is the cost of investment if depreciation charges are P10,000 annually? a. P100,000 b. P180,000 c. P150,000 d. P80,000arrow_forward3. Problem 12.03 (After-Tax Salvage Value) M eBook Karsted Air Services is now in the final year of a project. The equipment originally cost $21 million, of which 100% has been depreciated. Karsted can sell the used equipment today for $8 million, and its tax rate is 25%. What is the equipment's after-tax salvage value? Write out your answer completely. For example, 13 million should be entered as 13,000,000. Round your answer to the nearest dollar. $arrow_forward
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