A large profitable corporation is considering a capital investment of $50,000. The equipment has a projected salvage value of $0 at the end of the two-year project period. The annual gross income each of the next two years is projected to be $44,000 and expenses are projected to be $14,000 annually. The depreciation amount will be $25,000 annually. This profitable corporation has an incremental income tax rate of 25% and the MARR is 10%. The corporation has decided to use borrowed capital to finance a portion of the equipment purchase. It will pay $30,000 down and finance the balance, to be repaid in two equal end-of-year $16,134.15 payments. The interest payment in Year 1 is $1500. The projections are based on current economic conditions without consideration of price or cost escalations. Nevertheless, a general inflation rate of 4% is expected, and it is anticipated that all future costs and revenues will react to this inflation. Determine the before-tax CF (including borrowed capital, in actual dollars) for Year 1 (only).
A large profitable corporation is considering a capital investment of $50,000. The equipment has a projected salvage value of $0 at the end of the two-year project period. The annual gross income each of the next two years is projected to be $44,000 and expenses are projected to be $14,000 annually. The depreciation amount will be $25,000 annually. This profitable corporation has an incremental income tax rate of 25% and the MARR is 10%. The corporation has decided to use borrowed capital to finance a portion of the equipment purchase. It will pay $30,000 down and finance the balance, to be repaid in two equal end-of-year $16,134.15 payments. The interest payment in Year 1 is $1500. The projections are based on current economic conditions without consideration of price or cost escalations. Nevertheless, a general inflation rate of 4% is expected, and it is anticipated that all future costs and revenues will react to this inflation. Determine the before-tax CF (including borrowed capital, in actual dollars) for Year 1 (only).
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![A large profitable corporation is considering a capital investment of $50,000. The equipment has a projected salvage value of $0 at the end of
the two-year project period. The annual gross income each of the next two years is projected to be $44,000 and expenses are projected to be
$14,000 annually. The depreciation amount will be $25,000 annually. This profitable corporation has an incremental income tax rate of 25% and
the MARR is 10%.
The corporation has decided to use borrowed capital to finance a portion of the equipment purchase. It will pay $30,000 down and finance the
balance, to be repaid in two equal end-of-year $16,134.15 payments. The interest payment in Year 1 is $1500.
The projections are based on current economic conditions without consideration of price or cost escalations. Nevertheless, a general inflation
rate of 4% is expected, and it is anticipated that all future costs and revenues will react to this inflation.
Determine the before-tax CF (including borrowed capital, in actual dollars) for Year 1 (only).](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8c0ef31b-75a9-41b1-ada2-c243e114a1f7%2F16aeac5e-d559-4e41-8cab-3c6eeae6ee84%2Fw17i9dl_processed.jpeg&w=3840&q=75)
Transcribed Image Text:A large profitable corporation is considering a capital investment of $50,000. The equipment has a projected salvage value of $0 at the end of
the two-year project period. The annual gross income each of the next two years is projected to be $44,000 and expenses are projected to be
$14,000 annually. The depreciation amount will be $25,000 annually. This profitable corporation has an incremental income tax rate of 25% and
the MARR is 10%.
The corporation has decided to use borrowed capital to finance a portion of the equipment purchase. It will pay $30,000 down and finance the
balance, to be repaid in two equal end-of-year $16,134.15 payments. The interest payment in Year 1 is $1500.
The projections are based on current economic conditions without consideration of price or cost escalations. Nevertheless, a general inflation
rate of 4% is expected, and it is anticipated that all future costs and revenues will react to this inflation.
Determine the before-tax CF (including borrowed capital, in actual dollars) for Year 1 (only).
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