After-Tax Cash Flows: Final DisposalAt the end of the life of the project, there are two major sources of cash: (1) release of working capital and (2) preparation, removal, and sale of theequipment (salvage value effects). Any working capital committed to a project is released at this point. The release of working capital is a cash inflowwith no tax consequences. Disposing of an asset associated with a project also has cash consequences. At times, an asset may have a market value atthe end of its life. The selling price less the cost of removal and cleanup produces a gross cash inflow. See Step 3 for how to calculate the tax effectsassociated with the disposal of an asset.Apply the ConceptsA company invested $180,000 of working capital at the beginning of a project. At the end of the project, an asset has a selling price of $120,000. Itsremoval and cleanup costs total $30,000. The book value of the asset is $15,000. The tax rate is 40 percent.Required:Calculate the after-tax expected cash flow at the end of the project's life: $ 240,000 XFeedback

The after-tax expected cash flow considers two factors:Release of working capital: This is the cash…

Answered: After-Tax Cash Flows: Final Disposal At…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 7QTD

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We are analyzing a project and have gathered the following data. Based on this data, what is the average accounting rate of return? The project's assets will be depreciated using straight-line depreciation to a zero book value over the life of the project. Year Cash Flow Net Income 0 $285,000 n/a 1 $83,650 $12,400 2 $92,850 $21,600 3 $94,350 $23,100 4 $93,250 $22,000
Which of the following best describes depreciation?A It is a means of spreading the payment for the asset over its total estimated lifeB It represents the decline in the market value of the assetC It is a means of spreading the cost of an asset over its estimated useful lifeD It is a way of estimating the cash needed to replace the asset in the future
Note: The following data relate to two investment projects, only one of which may be selected: Initial capital expenditure Profit per year Year 1 Project Madiba R'000 45 000 9.000 Project Luthuli R'000 45 000 22 500 Year 2 18 000 9.000 Year 3 13 500 21 500 Year 4 9 000 23 500 Expected resale value at end of year 4 9 000 0 Note: Profit is calculated after deducting straight-line depreciation The cost of capital is 15% -Profit is calculated after deducting straight-line depreciation -The cost of capital is 15% Required: 3.1 Calculate the payback period for both projects each (year, month and days).(6 marks) 3.2 Calculate the accounting rate of return for each project. (6 marks) 3.3 Use the net present value (NPV) method to determine which project should be chosen. (9 marks) 3.4 Briefly discuss the merits of using the NPV method (4 marks)
4. What factors should be considered when estimating a new business' NINV? Is it any different for an asset replacement project. 5. Why is depreciation, a noncash expense, considered when estimating a project's net cash flows? 6. What are the potential tax consequences of selling an old asset in an asset replacement investment decision?
Which of the following statements is (are) correct?a. Accumulated depreciation represents a cash fund beingaccumulated for the replacement of plant assets.b. The cost of a machine includes the cost of repairingdamage to the machine during the installation process.c. A company may use different depreciation methods inits financial statements and its income tax return.d. The use of an accelerated depreciation method causesan asset to wear out more quickly than does use of thestraight-line method.
What is the project s year 4 cash flow? General accounting question
Which of the following statement best describes depreciation? a. It is a means of spreading the payment for non-current assets over a period of years b. It is a decline in the market value of assets c. It is a means of spreading the cost of non-current assets over the estimated useful life d. It is a means of estimating the amount of money needed to replace the assets
Assuming that there are no income taxes, which of the following is correct concerning depreciation? Select one: a. Depreciation reduces net income but does not change cash from operations. b. Depreciation provides less cash from operations than would have been available without the depreciation. c. Depreciation builds a cash reserve to fund the replacement of plant, property and equipment d. None of the other choices is correct. e. Depreciation increases cash from operations and decreases net income.
Discuss the effect on Free Cash Flow in each of the following situations. Assume that all other things remain constant. d) Increase in time over which capitalized expenses are depreciated e) Now only 60% of NWC is recoverable when a project winds up
The following data concern an investment project (Ignore income taxes.): Investment in equipment Annual net cash inflows $ 215,000 $ 56,000 $ 70,700 $ 27,000 Salvage value of the equipment Working capital required Life of the project Required rate of return 5 years Net present value 12% The working capital will be released for use elsewhere at the conclusion of the project. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided. Required: Compute the project's net present value. Note: Round your intermediate calculations and final answer to the nearest whole dollar amount.
The economic service life of a project is best described as _____________________? a. Another term for the analysis period of a benefit-cost analysis.b. The number of years for which depreciation is on-going for an asset.c. The present worth of the project after taxes.d. The amount of time (usually in years) that an asset should be used to achieve thesmallest annual cost of operation.
An asset that was originally purchased for $647,401 is being depreciated straight-line over its useful life to zero. At the end of the project the asset can be sold for $447,466. In addition to the operating cash flow of $744,903 in the final year of the project, net operating working capital of $56,560 will be recovered as a result of a reduction in inventory. What is the free cash flow at the end of the project? The company's tax rate is 40% and the WACC is 9%. Express your answer to the nearest dollar.

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