1. A company anticipates a depreciation deduction of $70,000 in year 4 of a proj
ID: 2411610 • Letter: 1
Question
1. A company anticipates a depreciation deduction of $70,000 in year 4 of a project. The company's tax rate is 40% and its discount rate is 12%. The present value of the depreciation tax shield resulting from this deduction is closest to:
A) $17,808
B) $29,000
C) $21,000
D) $13,356
2. (Ignore income taxes in this problem.) Nevland Corporation is considering the purchase of a machine that would cost $120,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of $18,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $43,000. The company requires a minimum pretax return of 19% on all investment projects. The net present value of the proposed project is closest to:
A) $32,966
B) $26,376
C) $64,902
D) $30,040
3. (Ignore income taxes in this problem) The management of Elamin Corporation is considering the purchase of a machine that would cost $305,745 and would have a useful life of 9 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $51,000 per year. The internal rate of return on the investment in the new machine is closest to:
A) 9%
B) 11%
C) 12%
D) 10%
4. (Ignore income taxes in this problem.) The management of Solar Corporation is considering the following three investment projects:
Project L
Project M
Project N
Investment required.......................
$37,000
$55,000
$82,000
Present value of cash inflows........
$39,480
$60,150
$90,200
Rank the projects according to the profitability index, from most profitable to least profitable.
A) M,N,L
B) L,N,M
C) N,L,M
D) N,M,L
5. (Ignore income taxes in this problem.) The management of Lanzilotta Corporation is considering a project that would require an investment of $368,600 and would last for 8 years. The annual net operating income from the project would be $66,000, which includes depreciation of $31,000. The scrap value of the project's assets at the end of the project would be $15,000. The payback period of the project is closest to:
A) 3.8 years
B) 2.6 years
C) 2.7 years
D) 4.0 years
6. Dunn Construction, Inc., has a large crane that cost $35,000 when purchased ten years ago. Depreciation taken to date totals $25,000. The crane can be sold now for $8,000. Assuming a tax rate of 40%, if the crane is sold the total after-tax cash inflow for capital budgeting purposes will be:
A) $7,400
B) $10,000
C) $8,800
D) $8,000
Project L
Project M
Project N
Investment required.......................
$37,000
$55,000
$82,000
Present value of cash inflows........
$39,480
$60,150
$90,200
Explanation / Answer
Q1. Answer is A. $ 17808 Explanation: Annual depreciation 70000 Tax benefit of depreciation 28000 Present value factor fr 4 year at 12% 0.63552 Present value of Tax shield of depreciation 17794.56 Q2. Answer is A. $ 32966 Explanation: Annual cost saving 43000 Annuity factor for 6 years at 19% 3.4098 Present value of cash inflows 146621.4 Add: Present value of salavage 6337.8 (18000*0.3521) Present value of inflows 152959.2 Less: Initial investment 120,000 Net present value 32959 Q3. Answer is A. 9% Explanation: Annual inflows 51000 Annuity factor for 9 years at 9% 5.995 Preesent value of inflows 305745 Less: Initial investment 305745 NPV 0 Hence, IRR is 9% Q4. Answer is D. NML Explanation: Project L Project M Project N Presennt value of inflows 39480 60150 90200 Divide: Initial Investment 37000 55000 82000 Profitability Index 1.07 1.09 1.10 Q5. Answer is A. 3.8 years Explanation: Annual inflows: 66000+31000 = 97000 Payback period: Initial investmennt/ Annual inflows 368600/97000 = 3.80 years Q6. Answer is C. $ 8800 Eexplanation: Sales price 8000 Add: tax benefit on Loss 800 (35000-25000-8000)*40% Cash inflow for sale 8800
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.