A road construction company is considering the purchase of a gravel hauler as it prepares for a new season of rural road construction. The hauler will cost $110,000, last six years with a salvage value of $20,000, and reduce annual maintenance, insurance, and labour costs by $30,000 per year. The after-tax MARR is 9% and the corporate tax rate is 55%. a. What is the exact after-tax IRR for this purchase? b. What is the approximate after-tax IRR for this purchase? c. Should the company buy the gravel hauler? Why or why not?

A road construction company is considering the purchase of a gravel hauler as it prepares for a new season of rural road construction. The hauler will cost $110,000, last six years with a salvage value of $20,000, and reduce annual maintenance, insurance, and labour costs by $30,000 per year. The after-tax MARR is 9% and the corporate tax rate is 55%. a. What is the exact after-tax IRR for this purchase? b. What is the approximate after-tax IRR for this purchase? c. Should the company buy the gravel hauler? Why or why not?

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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Laurel’s Lawn Care Limited has a new mower line that can generate revenues of $120,000 per year. Direct production costs are $40,000, and the fixed costs of maintaining the lawn mower factory are $15,000 a year. The factory originally cost $1 million and is being depreciated for tax purposes over 25 years using straight-line depreciation. Calculate the operating cash flows of the project if the firm’s tax bracket is 25%.
Acompany is evaluating the addition of equipment to its presentoperations. They need to purchase equipment for $160,000. The five year MACRS GDS Recovery Method is appropriate forthe investment and the total tax rate (federal plus state) is 40%. Gross revenue is expected to be $30,000/year while maintenance costs are expected to be $5,000/year. It is expected that the operation will be shut down at the end of the fourth year with a salvage value of $20,000.1-Prepare a table showing your development of the ATCF's.
Spotted Potato is evaluating project A, which would require the purchase of a piece of equipment for $550,000. During year 1, project A is expected to have relevant revenue of $312,000.00, relevant costs of $105,000.00, and some depreciation. Spotted Potato would need to borrow $550,000 for the equipment and would need to make an interest payment of $40,000 to the bank in year 1. Relevant net income for project A in year 1 is expected to be $96000.00 and operating cash flows for project A in year 1 are expected to be $167000.00. Straight-line depreciation would be used. What is the tax rate expected to be in year 1? 29.41% (plus or minus 3 bps) 13.51% (plus or minus 3 bps) 70.59% (plus or minus 3 bps) 34.53% (plus or minus 3 bps) none of the answers are within 3 bps of the correct answer
Your firm needs a computerized machine tool lathe which costs $50,000 and requires $12,000 in maintenance for each year of its 3-year life. After three years, this machine will be replaced. The machine falls into the MACRS 3-year class life category, and neither bonus depreciation nor Section 179 expensing can be used. Assume a tax rate of 21 percent and a discount rate of 12 percent.Calculate the depreciation tax shield for this project in year 3. (Round your answer to 2 decimal places.)
Laurel's Lawn Care Ltd., has a new mower line that can generate revenues of $174,000 per year. Direct production costs are $58,000, and the fixed costs of maintaining the lawn mower factory are $24,000 a year. The factory originally cost $1.45 million and is being depreciated for tax purposes over 25 years using straight-line depreciation. Calculate the operating cash flows of the project if the firm's tax bracket is 25%. (Enter your answer in dollars not in millions.) Operating cash flows
Acompany is evaluating the addition of equipment to its presentoperations. They need to purchase equipment for $160,000. The five year MACRS GDS Recovery Method is appropriate forthe investment and the total tax rate (federal plus state) is 40%. Gross revenue is expected to be $30,000/year while maintenance costs are expected to be $5,000/year. It is expected that the operation will be shut down at the end of the fourth year with a salvage value of $20,000. 2-Draw a BTCFD
Karsted Air Services is now in the final year of a project. The equipment originally cost $27 million, of which 100% has been depreciated. Karsted can sell the used equipment today for $6 million, and its tax rate is 30%. What is the equipment's after-tax salvage value? Write out your answer completely. For example, 13 million should be entered as 13,000,000. Round your answer to the nearest dollar.
Land Development Corporation is considering the purchase of a bulldozer. The bulldozer will cost $100,000 and will have an estimated salvage value of $30,000 at the end of six years. The asset will generate annual before-tax revenues of $80,000 over the next six years. The asset is classified as a five-year MACRS property. The marginal tax rate is 40%, and the firm's market interest rate is known to be 18%. All dollar figures represent constant dollars at time zero and are responsive to the general inflation rate J.(a) With 1=6% compute the after-tax cash flows in actual dollars.(b) Determine the real rate of return of this project on an after-tax basis.(c) Suppose that the initial cost of the project will be financed through a local bank at an interest rate of 12% and with an annual payment of $24,323 over six years. With this additional condition, the rework part (a).(d) From your answer to part (a), determine the PW loss due to inflation.(e) From your answer to part (c), determine…
Celtic Inc. is considering a 16-year project that will generate before tax cash flow of $18,000 peryear for 16 years. The project requires a machine that costs $96,000. The CCA rate is 20% andthe salvage value is $9,600. Celtic has cash of $66,000 and needs to borrow the balance at 6%interest rate to purchase the machine. Celtic is required to repay $10,000 at year 4 and theremaining balance at year 16. The corporate tax rate is 30%.If the weighted average cost of capital is 11% and the machine is the only asset in the assetclass, calculate the NPV of the project using the WACC approach.
You are working on a bid to build four small apartment buildings a year for the next three years for a local community. This project requires the purchase of $900,000 of equipment which will be depreciated at a CCA rate of 30% over the next three years. The equipment can be sold at the end of the project for $400,000 (ignore any gains or losses). You plan to borrow half of the equipment cost at a rate of 5.5%. You will also need $200,000 in net working capital maintained over the life of the project. The labour costs are expected to be $100,000 per year, fixed costs will be $175,000 a year and the materials will be $140,000 per building per year. Your required rate of return is 12% for this project. Ignoring taxes, what is the minimal amount, that you should bid per building?
Your firm needs a machine which costs $120,000, and requires $33,000 in maintenance for each year of its 5 year life. After 5 years, this machine will be replaced. The machine falls into the MACRS 5-year class life category. Assume a tax rate of 35 percent and a discount rate of 15 percent. What is the depreciation tax shield for this project in year 5?

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