A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change? a. The firm's cash flow would increase. b. The firm's operating income (EBIT) would increase. c. The firm's taxable income would increase. d. The firm's reported net income would increase. e. The firm's tax payments would increase.

A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change? a. The firm's cash flow would increase. b. The firm's operating income (EBIT) would increase. c. The firm's taxable income would increase. d. The firm's reported net income would increase. e. The firm's tax payments would increase.

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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As part of their investment strategy, the Carringtons have decided to put $100,000 into stock market investments and also into purchasing precious metals. The performance of the investments depends on the state of the economy in the next year. In an expanding economy, it is expected that their stock market investment will outperform their investment in precious metals, whereas an economic recession will have precisely the opposite effect. Suppose the following payoff matrix gives the expected percentage increase or decrease in the value of each investment for each state of the economy. Stock market investment Commodity investment Expanding Economic economy recession -10t 10 commodities 15 5 (a) Determine the optimal investment strategy for the Carringtons' investment of $100,000. (Round your answers to the nearest dollar.) stocks $ $ PRACTICE ANOTHER (b) What profit can the Carringtons expect to make on their investments over the year if they use their optimal investment strategy?…
Hi. I need an understanding of how to calculate a projects net investments and cash flows. The image is attached.
(c) Company X plans to purchase a methanol plant for $1 million. The plant is expected to generate $200,000 in total annual revenue at the end of its first year of operations, after which revenues are expected to grow by 2% per year as operations become more efficient. If the opportunity cost of capital in the market is 5%, determine: i. the net present value of this investment if the plant is expected to remain open forever. ii. if this company should purchase this plant. Give a reason for your answer
48) Management expects a project to generate EBIT of $600,000 per year for 4 years.Depreciation expense is expected to be $225,000 per year and the corporation’s tax rateis 40%. The project will require an increase in net working capital of $50,000 in yearone and allow a decrease in net working capital of $25,000 in year four. The capitalexpenditure for the project will occur in year zero. What is the free cash flow for theproject in year one?
3. Solar Solutions has purchased new manufacturing equipment that cost $400,000. Calculate the yearly tax savings from the CCA tax shield for the next three years. Assume that the income tax rate is 30%, the CCA rate is 30%, and the weighted-average cost of capital (WACC) is 12%. Assume that CCA in the first year is subject to the accelerated depreciation method for the year of acquisition. (Hint. Use Microsoft Excel to calculate the discount factor(s).) (Do not round your intermediate calculations. Round your final answers to 2 decimal places.) X Answer is complete but not entirely correct. Year 1 2 3 $ $ $ PV of Tax Savings 91,071.43 x 56,919.64 X 35,574.78 X
Your firm spends $403,000 per year in regular maintenance of its equipment. Due to the economic downturn, the firm considers forgoing these maintenance expenses for the next 3 years. If it does so, it expects it will need to spend $2.1 million in year 4 replacing failed equipment. a. What is the IRR of the decision to forgo maintenance of the equipment? b. Does the IRR rule work for this decision? c. For what costs of capital (COC) is forgoing maintenance a good decision? a. What is the IRR of the decision to forgo maintenance of the equipment? The IRR of the decision is%. (Round to two decimal places.)
Accounting The SWEET Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $200,000. The equipment will have an initial cost of $900,000 and have a 6-year life. The salvage value is $60,000 at the end of the sixth year. If the hurdle rate is 12%, the internal rate of return is ____ %. (express your final answer in basis points, i.e., 13.14%)
You are preparing the business plan for a new company. A net revenue analysis covering the first 6 years is required for obtaining financing. Net revenue in year 1 is expected to be $50,000 and increase by 15% each year, thereafter. If i = 12% and the net revenue is assumed to be an end-of-year cash flow, what is the present value of the cash flow series over the 6 years?
Example: A corporation is contemplating the purchase of some specialized machinery. The machinery will cost $250,000 and will be depreciated over its five year life by using the straight line method. Annual inflows of $300,000 and cash operating expenses of $220,000 are anticipated as a result of this new machinery. The corporation is subject to a 40 percent income tax rate. The payback period on this investment (rounded to the nearest tenth) is:
A. Assume that you have completed your plans and proformas for the next year of operations. The upcoming year looks promising. What would you most likely do from the following list? a. From your proformas project your company’s weighted average cost of capital and return on assets, and compare the two b. Take a vacation because you have been working so hard c. Purchase a new house for your personal use because the future is looking so good d. Make sure that your company’s weighted average cost of capital exceeds your company’s return on assets, if not, rework your plans and proformas B. Assume that all sales are on account. If the average accounts receivable balance was $1,000,000 and accounts receivable turnover was 12 for the last year of operations, what was sales revenue? a. $10,000,000 b. $15,000,000 c. $12,000,000 d. $6,000,000
As part of their investment strategy, the Carringtons have decided to put $100,000 into stock market investments and also into purchasing precious metals. The performance of the investments depends on the state of the economy in the next year. In an expanding economy, it is expected that their stock market investment will outperform their investment in precious metals, whereas an economic recession will have precisely the opposite effect. Suppose the following payoff matrix gives the expected percentage increase or decrease in the value of each investment for each state of the economy. Expanding Economic economy recession Stock market investment Commodity investment 30 5 -10 20 (a) Determine the optimal investment strategy for the Carringtons' investment of $100,000. (Round your answers to the nearest dollar.) stocks $ commodities $

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