Question 5 Jimmy Corporation is considering to start a new project. If the project is launched, cost savings can be generated in each of the next 5 years are as follows: Year Cost Savings $40,000 2 $60,000 $25,000 $42,000 $10,000 3 4 5 To successfully launch the project, the company needs to have a new machine and additional net working capital at the beginning of the project (Year 0). The price of the machine is $80,000, and it requires an additional installation cost of $10,000 to fit the machine for the project. In five years, the machine can be sold at $20,000. It is known that the machine would apply five-year MACRS for tax purpose. To start the project, it requires $30,000 net working capital in year 0, and this amount will be recovered when the project is ended at the end of year 5. The appropriate discount rate for this project is 10%, and the tax rate is 15%. Year 3-year MACRS percent 5-year MACRS Percent 7-year MACRS percent (%) 20.00 (%) 33.33 (%) 14.29 1 44.45 32.00 24.49 3 14.81 19.20 17.49 4 7.41 11.52 12.49 11.52 8.93 6 5.76 8.92 7 8.93 8 4.46 a) Calculate the depreciation expense for cach year from year 1 to year 5. b) Calculate the operating cash flows for each year from year 1 to year 5. c) Calculate the net capital spending for each year from year 0 to year 5. d) Calculate the cash flow from asset for each year from year 0 to year 5.
Question 5 Jimmy Corporation is considering to start a new project. If the project is launched, cost savings can be generated in each of the next 5 years are as follows: Year Cost Savings $40,000 2 $60,000 $25,000 $42,000 $10,000 3 4 5 To successfully launch the project, the company needs to have a new machine and additional net working capital at the beginning of the project (Year 0). The price of the machine is $80,000, and it requires an additional installation cost of $10,000 to fit the machine for the project. In five years, the machine can be sold at $20,000. It is known that the machine would apply five-year MACRS for tax purpose. To start the project, it requires $30,000 net working capital in year 0, and this amount will be recovered when the project is ended at the end of year 5. The appropriate discount rate for this project is 10%, and the tax rate is 15%. Year 3-year MACRS percent 5-year MACRS Percent 7-year MACRS percent (%) 20.00 (%) 33.33 (%) 14.29 1 44.45 32.00 24.49 3 14.81 19.20 17.49 4 7.41 11.52 12.49 11.52 8.93 6 5.76 8.92 7 8.93 8 4.46 a) Calculate the depreciation expense for cach year from year 1 to year 5. b) Calculate the operating cash flows for each year from year 1 to year 5. c) Calculate the net capital spending for each year from year 0 to year 5. d) Calculate the cash flow from asset for each year from year 0 to year 5.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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part c, d
Transcribed Image Text:Question 5
Jimmy Corporation is considering to start a new project. If the project is launched, cost savings
can be generated in each of the next 5 years are as follows:
Year
Cost Savings
$40,000
$60,000
$25,000
$42,000
3
4
5
$10,000
To successfully launch the project, the company needs to have a new machine and additional net
working capital at the beginning of the project (Year 0). The price of the machine is $80,000, and
it requires an additional installation cost of $10,000 to fit the machine for the project. In five
years, the machine can be sold at $20,000. It is known that the machine would apply five-year
MACRS for tax purpose.
To start the project, it requires $30,000 net working capital in year 0, and this amount will be
recovered when the project is ended at the end of year 5. The appropriate discount rate for this
project is 10%, and the tax rate is 15%.
Year
3-year MACRS percent 5-year MACRS Percent
7-year MACRS percent
(%)
33.33
(%)
20.00
(%)
1
14.29
44.45
32.00
24.49
3
14.81
19.20
17.49
4
7.41
11.52
12.49
5
11.52
8.93
5.76
8.92
7
8.93
8
4.46
a) Calculate the depreciation expense for each year from year 1 to year 5.
b) Calculate the operating cash flows for each year from year 1 to year 5.
c) Calculate the net capital spending for each year from year 0 to year 5.
d) Calculate the cash flow from asset for each year from year 0 to year 5.
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