Benton is a rental car company that is trying to determine whether to add 25 cars to itsfleet. The company fully depreciates all its rental cars over six years using the straight-line method. The new cars are expected to generate $195,000 per year in earningsbefore taxes and depreciation for six years. The company is entirely financed by equityand has a 23 percent tax rate. The required return on the company's unlevered equity is12 percent and the new fleet will not change the risk of the company. The risk-free rate is5 percent.a. What is the maximum price that the company should be willing to pay for the newfleet of cars if it remains an all-equity company? (Do not round intermediatecalculations and round your answer to 2 decimal places, e.g., 32.16.)b. Suppose the company can purchase the fleet of cars for $700,000. Additionally,assume the company can issue $520,000 of six-year debt to finance the project atthe risk-free rate of 5 percent. All principal will be repaid in one balloon payment atthe end of the sixth year. What is the APV of the project? (Do not round intermediatecalculations and round your answer to 2 decimal places, e.g., 32.16.)a.Maximum priceb. APV

Concept. APV. ( Adjusted present value.) It is net present value of the project if it were funded…

Answered: Benton is a rental car company that is…

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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Spherical Manufacturing recently spent $16 million to purchase some equipment used in the manufacture of disk drives. This equipment has a CCA rate of 45% and Spherical's marginal corporate tax rate is 34% a. What are the annual CCA deductions associated with this equipment for the first five years? b. What are the annual CCA tax shields for the first five years? c. What is the present value of the first five CCA tax shields if the appropriate discount rate is 12% per year? d. What is the present value of all the CCA tax shields assuming the equiment is never sold and the appropriate discount rate is 12% per year? e. How might your answer to part (d) change if Spherical anticipates that its marginal corporate tax rate will increase substantially over the next five years? a. What are the annual CCA deductions associated with this equipment for the first five years? The CCA deduction for year 1 is $3600000 (Round to the nearest dollar) The CCA deduction for year 2 is $ (Round to the…
Builtrite is considering purchasing a new machine that would cost $60,000 and the machine would be depreciated (straight line) down to $0 over its five year life. At the end of five years it is believed that the machine could be sold for $15,000. The machine would increase EBDT by $42,000 annually. Builtrite’s marginal tax rate is 34%. What is the TCF associated with the purchase of this machine? $5,100 $7,500 $0 $9,900
Raiders Restaurant is considering the purchase of a $10,000,000 flat-top grill. The grill has an economic life of 6 years and will be fully depreciated using the straight-line method. The grill is expected to produce 600,000 tacos per year for the next 6 years, each taco costing $4 to make and priced at $11. Assume the discount rate is 12% and the tax rate is 21%. The restaurant expects the market value of the grill to be $0, 6 years from now. Calculate the book value of the grill at the end of year 3. (Round to 2 decimals) Calculate the operating cash flow at the end of year 4.
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Mansukh
Spherical Manufacturing recently spent $19 million to purchase some equipment used in the manufacture of disk drives. This equipment has a CCA rate of 25% and Spherical's marginal corporate tax rate is 38%. a. What are the annual CCA deductions associated with this equipment for the first five years? b. What are the annual CCA tax shields for the first five years? c. What is the present value of the first five CCA tax shields if the appropriate discount rate is 10% per year? d. What is the present value of all the CCA tax shields assuming the equiment is never sold and the appropriate discount rate is 10% per year? e. How might your answer to part (d) change if Spherical anticipates that its marginal corporate tax rate will increase substantially over the next five years?
Build Corporation wants to purchase a new machine for $295,000. Management predicts that the machine can produce sales of $187,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $69,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Build's combined income tax rate is 20%. Management requires a minimum after-tax rate of return of 13% on all investments. What is the net after-tax cash inflow in Year 1 from the investment?
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Benton is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over five years using the straight- line method. The new cars are expected to generate $210,000 per year in earnings before taxes and depreciation for five years. The company is entirely financed by equity and has a 22 percent tax rate. The required return on the company's unlevered equity is 11 percent and the new fleet will not change the risk of the company. The risk-free rate is 4 percent. a. What is the maximum price that the company should be willing to pay for the new fleet of cars if it remains an all-equity company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Suppose the company can purchase the fleet of cars for $665,000. Additionally, assume the company can issue $450,000 of five-year debt to finance the project at the risk-free rate of 4 percent. All principal will be repaid…
Taufel, Inc. is considering implementing a cost-cutting project. The pre-tax cost reduction is expected to be $ 18,000 for each of the three years of the project's life. The project has an initial cost of $40,000 and belongs in a 20% CCA class. The company has a tax rate of 32% and the discount rate for the project is 9%. The project can be sold to another company at the end of year 3 for $2,000. What is the NPV of the project? $771 $650 $1,056 $1,379

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