Answered: 1. Initial investment 2. Revenues 3.…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Taxes are costs, and, therefore, changes in tax rates can affect consumer prices, project lives, and the value of existing firms. Evaluate the change in taxation on the valuation of the following project:

Assumptions: Tax depreciation is straight-line over three years. Pre-tax salvage value is 25 in Year 3 and 50 if the asset is scrapped in Year 2. Tax on salvage value is 40% of the difference between salvage value and book value of the investment. The cost of capital is 20%.

4. Would it now make sense to terminate the project after two rather than three years?

5. How would your answers change if the corporate income tax were abolished entirely?

NOTE: The three initial question was sent before these last two. please clarify the answer as much as possible in the Excel spreadsheet. The table to the question is attchedThank you

1. Initial investment
2. Revenues
3. Cash operating costs
4. Tax depreciation
5. Income pretax
6. Tax at 40%
7. Net income
8. After-tax salvage
9. Cash flow (7 +8+4-1)
NPV at 20% = 0
100
-100
100
50
33.33
16.67
6.67
10
+43.33
2
100
50
33.33
16.67
6.67
10
+43.33
3
100
50
33.33
16.67
6.67
10
15
+58.33

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