Oz Corp. Learning Activity A . Oz Corp. is now in the final year of a project. T
ID: 2647374 • Letter: O
Question
Oz Corp. Learning Activity
A. Oz Corp. is now in the final year of a project. The equipment originally cost $9400, and the asset has been 75% depreciated. Oz can sell the used equipment today for $1000, and its tax rate is 35%. The equipment's after-tax net salvage value is $_________.
B. Oz Corp. is now considering a project which would involve the purchase of new manufacturing equipment at a cost of $8400. The equipment would be depreciated on a straight-line basis to a book value of $700 over its 5-year useful life. The firm's marginal tax rate is 35%. The amount of the annual depreciation tax shield that should be included as part of the project's cash flows would be $_______.
C. Oz Corp's new project, Project M, will require a $2200 increase in Inventories up front, and will simultaneously cause Accounts Payable to increase by $1600. The net cash flow impact of these changes in year 0 should be recorded as $_______ in the project's cash flow table.
D. Another new project involves the purchase of a $9000 food processing machine. The machine would be depreciated on a straight-line basis over its 3-year useful life to a book value of $300. At the end of the life of the project (at the year 3 point), the machine will be sold for an estimated $800. The project will cause an increase in Sales of $7000 in each of years 1 through 3. It is also expected to enhance efficiencies and reduce operating expenses by $1000 in each of years 1 through 3. The project will require an increase in Accounts Receivable of $1500 and an increase in Accounts Payable of $800 up front. The project's impact on these accounts is expected to disappear at project end (in year 3). The firm's marginal tax rate is 40%, and its WACC is 12%. The NPV of this project is $_________.
E. A stock will pay dividends of $1.30 four years from today, $1.50 five years from today, and $2.20 six years from today. There will be no dividend payments prior to year 4. After year 6, the growth rate in dividends per year is expected to be 6% forever. The required return on the stock is 11%. P3, the price of the stock 3 years from now, should be $_____.
Explanation / Answer
A. Oz Corp. is now in the final year of a project. The equipment originally cost $9400, and the asset has been 75% depreciated. Oz can sell the used equipment today for $1000, and its tax rate is 35%. The equipment's after-tax net salvage value is $_________.
Answer
Equipment's after-tax net salvage value = Sale Value - (Sale Value -Book Value)*tax rate
Equipment's after-tax net salvage value = 1000 - (1000 - (9400 - 75%*9400))*35%
Equipment's after-tax net salvage value = $ 1472.50
B. Oz Corp. is now considering a project which would involve the purchase of new manufacturing equipment at a cost of $8400. The equipment would be depreciated on a straight-line basis to a book value of $700 over its 5-year useful life. The firm's marginal tax rate is 35%. The amount of the annual depreciation tax shield that should be included as part of the project's cash flows would be $_______.
Answer
Annual Depreciation = (8400-700)/5 = $ 1540
Annual depreciation tax shield = 1540*35%
Annual depreciation tax shield = $ 539
C. Oz Corp's new project, Project M, will require a $2200 increase in Inventories up front, and will simultaneously cause Accounts Payable to increase by $1600. The net cash flow impact of these changes in year 0 should be recorded as $_______ in the project's cash flow table.
Net cash flow impact = 1600 - 2200
Net cash flow impact = - $ 600
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