elstar Communications is going to purchase an asset for $720,000 that will produce $350,000 per year warnings before depreciation and taxes. The asset will be depreciated using the three-year MACRS depre 2. (This represents four years of depreciation based on the half-year convention) The firm is in a 25 perc

elstar Communications is going to purchase an asset for $720,000 that will produce $350,000 per year warnings before depreciation and taxes. The asset will be depreciated using the three-year MACRS depre 2. (This represents four years of depreciation based on the half-year convention) The firm is in a 25 perc

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 18E

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The Summit Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $340,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years: Use Table 12-12. Year 1 Year 2 Year 3 Year 4 $ 160,000 209,000 75,000 68,000 The firm is in a 35 percent tax bracket and has a cost of capital of 9 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Calculate the net present value. Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places. Net present value b. Under the net present value method, should Summit Petroleum Corporation purchase the asset? O Yes O No
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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…
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