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 how much the project has to generate in additional before-tax annual revenues in actual dollars (equalamount) in order to make up the inflation loss.
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
(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 how much the project has to generate in additional before-tax annual revenues in actual dollars (equal
amount) in order to make up the inflation loss.
Please note that we have solved the first question. Please submit the other questions separately.
Bulldozer cost $100,000
Salvage value $30,000
Timeline - 6 years.
Annual before-tax revenues $80,000
Depreciation 5-year MACRS property.
Marginal tax rate 40%
Market interest rate 18%.
With Inflation =6% compute the after-tax cash flows in actual dollars.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
