Ford Motor Company is considering launching a new line of Plug-in Electric SUVs.
ID: 2777938 • Letter: F
Question
Ford Motor Company is considering launching a new line of Plug-in Electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year. Without the new SUV, Ford expects to earn pre-tax income of $80 million from operations next year. Ford pays a 30% tax rate on its pre-tax income.
3. The amount that Ford Motor Company owe in taxes next year with the launch of the new SUV is closest to:
a. $13.5 million
b. $31.5 million
c. $56.0 million
d. $24.0 million
4. Which of the following cash flows are relevant incremental cash flows for a project that you are currently considering investing in?
a. The tax savings brought about by the project's depreciation expense
b. The cost of a marketing survey you conducted to determine demand for the proposed project
c. Interest payments on debt used to finance the project
d. Research and Development expenditures you have made
5. An exploration of the effect on NPV of changing multiple project parameters is called:
a. scenario analysis.
b. IRR analysis.
c. accounting break-even analysis.
d. sensitivity analysis.
6. Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects:
Year
0
1
2
3
Sales (Revenues)
100,000
100,000
100,000
- Cost of Goods Sold (50% of Sales)
50,000
50,000
50,000
- Depreciation
30,000
30,000
30,000
= EBIT
20,000
20,000
20,000
- Taxes (35%)
7000
7000
7000
= unlevered net income
13,000
13,000
13,000
+ Depreciation
30,000
30,000
30,000
- capital expenditures
-90,000
The free cash flow for the first year of Epiphany's project is closest to:
a. $43,000
b. $25,000
c. $13,000
d. $45,000
Year
0
1
2
3
Sales (Revenues)
100,000
100,000
100,000
- Cost of Goods Sold (50% of Sales)
50,000
50,000
50,000
- Depreciation
30,000
30,000
30,000
= EBIT
20,000
20,000
20,000
- Taxes (35%)
7000
7000
7000
= unlevered net income
13,000
13,000
13,000
+ Depreciation
30,000
30,000
30,000
- capital expenditures
-90,000
Explanation / Answer
3. Ford Motor Company is considering launching a new line of Plug-in Electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year. Without the new SUV, Ford expects to earn pre-tax income of $80 million from operations next year. Ford pays a 30% tax rate on its pre-tax income.
The amount that Ford Motor Company owe in taxes next year with the launch of the new SUV is closest to:
Ford Motor Company owe in taxes next year = Net Income * tax rate
Ford Motor Company owe in taxes next year = (80-35)*30%
Ford Motor Company owe in taxes next year = $ 13.50 Million
a. $13.5 million
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