A company is considering an investment of €50.000 made at the beginning of the year for a period of 5 years. At the end of the fifth year the investment will be sold at a scrap value of €10,000. The capital allowances can be claimed at 20% on a straight-line method. The corporation tax is 12.5% and is payable one year in arrears. Cost of capital is 10% Required Determine the tax savings of the investment.

A company is considering an investment of €50.000 made at the beginning of the year for a period of 5 years. At the end of the fifth year the investment will be sold at a scrap value of €10,000. The capital allowances can be claimed at 20% on a straight-line method. The corporation tax is 12.5% and is payable one year in arrears. Cost of capital is 10% Required Determine the tax savings of the investment.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 2P

See similar textbooks

Similar questions

Project A costs $5,000 and will generate annual after-tax net cash inflows of $1,800 for five years. What is the NPV using 8% as the discount rate?
A corporation expects to receive $32,000 each year for 15 years from the sale of a product. There will be an initial investment of $150,000. Manufacturing and sales expenses will be $8067 per year. Assume straight line depreciation, a 15-year useful life and no salvage value. Use a 46% income tax rate. What is the before and after-tax rate of return?
AZA Ltd is considering the purchase of a machine for R2 750 000, which would be sold after seven years for an estimated realisable value of R1 200 000. By this time capital allowances of R2 150 000 would have been claimed. The rate of corporation tax is 28%. Required What will be the tax payment on the balancing charge at the end of the five years? a. R182 000 b. R322 000 c. R168 000 d. R84 000
An asset costing £20,000 is expected to last three years when it can be sold for £16,000. The tax rate is 28%, capital allowances of 20% p.a. on a reducing balance basis are available and the cost of capital is 10%. What is the tax saving in respect of the capital allowances in year 2? Question 10Select one: a. £3,000 b. £2,526 c. £896 d. £717
A company is considering a project with annual after-tax cash flows of $2,500.00 per year for six years. The company's cost of capital is 14 percent. Present and future value factors for a 14 percent interest rate for six years are as follows: Future value of $1 2.195 Present value of $1 0.456 Future value of a series of equal payments 8.536 Present value of a series of equal payments 3.889 Using the net present value method, what is the maximum amount that the company should invest? A) $1,140.00 B) $5,487.50 C) $9,722.50 D) $21,340.00
A firm takes out a $300,000 loan to purchase an asset. It makes yearly payments of $30,000 plus interest at a 5% annual rate over 10 years. The asset brings in BTCF of $100,000 each year. The asset is purchased for the loan amount and is depreciated via the straight-line method over the term of the loan. The marginal tax rate is 35%. What is profit in the last year of the loan? $25,025 $43,550 $44,525 $45,500
The JLK Corporation is considering an investment that will cost RM80,000 andhave a useful life of 4 years. During the first 2 years, the net incremental after-taxcash flows are RM25,000 per year and for the last two years they are RM20,000per year. Calculate the payback period for this investment.
A firm, whose cost of capital is 8 percent, may acquire equipment for $146,825 and rent it to someone for a period of five years. Note: Although payment of rent is typically considered to be an annuity due, treat it as an ordinary annuity when completing this problem in a spreadsheet or when using present value factors. If the firm charges $38,730 annually to rent the equipment, what are the net present value and the internal rate of return on the investment? Use Appendix D to answer the questions. Use a minus sign to enter negative values, if any. Round your answers for the net present value to the nearest dollar and for the internal rate of return to the nearest whole number. NPV: $ IRR: % Should the firm acquire the equipment? The firm acquire the equipment as the net present value is , and the internal rate of return the firm's cost of capital. If the equipment has no estimated residual value, what must be the minimum annual rental charge for the firm to earn the required 8…
In order to finance a new project, a company borrowed $4,000,000 at 8% per year with the stipulation that the company would repay the loan plus all interest at the end of one year. Assume the company’s effective tax rate is 39%. What was the company’s cost of debt capital (a) before taxes, and (b) after taxes? (c) Compare the calculated after-tax cost with the approximated cost using Equation [10.4].
5) Tulip plc wishes to purchase a machine costing £800,000 with an expected life of four years and a residual value of £25,000. The company can claim capital allowances on a 25 percent reducing balance basis and pays corporation tax at an annual rate of 30 percent. All tax is paid one year in arrears. If Tulip plc has a cost of capital of 10 percent, what is the present value of the capital allowance tax benefits (to the nearest £1,000)? A) £199,000 B) £181,000 C) £165,000 D) £121,000
An investment of P3M can be made in a business that will produce uniform annual revenue of P1.2M for five years and then have a salvage value of 10% of the investment. Operations and maintenance will be P100, 000 per year. Taxes and insurance will be 5% of the first cost per year. The investor expects to earn not less than 20% before income taxes. Is this a good investment? Use the annual cost method.
A company has purchased a new piece of machinery for $100,000. The estimate it will result in annual cost savings of $15,000 per year, this will increase every year by $500. The machinery will last for 8 years, at which time it will be sold for $7,000. What is the company's BEFORE tax rate of return? The company estimates a federal tax rate of 21%. What is their AFTER tax rate of return?