Joliet Division has the capacity to make 1,500 units of an intermediate good tha
ID: 340820 • Letter: J
Question
Joliet Division has the capacity to make 1,500 units of an intermediate good that is sold both internally and on the open market for a price of $32 each. To make the product, Joliet incurs $7 of variable cost per unit and $12 of fixed costs per unit.
What is the minimum price Joliet would accept for an internal transfer of 1,000 units of the product if the division is operating at 100% capacity?
$19.00 each
$30.00 each
$ 7.00 each
D. $32.00 each
Souza Corporation Corporation is considering an investment in equipment for $75,000 with a four-year life and no salvage value. Souza uses the straight-line method of depreciation and is subject to a 35 percent tax rate.
Over the life of the project, the total tax shield created by depreciation is:
$75,000
$12,500
$26,250
$25,000
Arsenal Company is considering an investment in equipment costing $30,000 with a six-year life and no salvage value. Arsenal uses straight-line depreciation and is subject to a 35 percent tax rate. The expected net cash inflow before depreciation and taxes is projected to be $20,000 per year.
The Year 1 annual after-tax net cash inflow is:
$ 9,000
$14,750
$11,880
$29,800
A.$19.00 each
B.$30.00 each
C.$ 7.00 each
D. $32.00 each
Souza Corporation Corporation is considering an investment in equipment for $75,000 with a four-year life and no salvage value. Souza uses the straight-line method of depreciation and is subject to a 35 percent tax rate.
Over the life of the project, the total tax shield created by depreciation is:
$75,000
B.$12,500
C.$26,250
D.$25,000
Arsenal Company is considering an investment in equipment costing $30,000 with a six-year life and no salvage value. Arsenal uses straight-line depreciation and is subject to a 35 percent tax rate. The expected net cash inflow before depreciation and taxes is projected to be $20,000 per year.
The Year 1 annual after-tax net cash inflow is:
$ 9,000
B.$14,750
C.$11,880
D.$29,800
Explanation / Answer
1.D.$32. per unit.
SInce the division is operating at 100% capacity, the normal price charged to an outsider will be charged as transfer price per unit.
2.C.$26,250.
total tax sheild created by depreciation = depreciable amount * tax rate
here,
$75,000 is depreciable amount since there is no salvage value.
35% is the tax rate.
=>$75,000 * 35%
=>$26,250.
3.B.$14,750.
annual depreciation = (cost - salvage value) / life
=> (30,000 - 0) / 6 years
=>$5,000.
after tax cash flow = [EBITDA - depreciation] * (1 - tax rate) + depreciation
=>[$20,000 - $5,000] * (1- 0.35) + $5,000
=>$9,750 + $5,000
=>$14,750
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