NPV with Income Taxes: Straight-Line versus Accelerated Depreciation Carl William, Inc. is a conservatively managed boat company whose motto is, "The old ways are the good ways." Management has always used straight-line depreciation for tax and external reporting purposes. Although they are reluctant to change, they are aware of the impact of taxes on a project's profitability. Required For a typical $240,000 investment in equipment with a five-year life and no salvage value, determine the present value of the advantage resulting from the use of double-declining balance depreciation as opposed to straight-line depreciation. Assume an income tax rate of 21% and a discount rate of 20%. Also assume that there will be a switch from double-declining balance to straight-line depreciation in the fourth year. Note: Round your answers below to the nearest whole dollar. Present value of double-declining balance tax shield $ Present value of straight-line tax shield x $ x Advantage of double-declining balance depreciation $

NPV with Income Taxes: Straight-Line versus Accelerated Depreciation Carl William, Inc. is a conservatively managed boat company whose motto is, "The old ways are the good ways." Management has always used straight-line depreciation for tax and external reporting purposes. Although they are reluctant to change, they are aware of the impact of taxes on a project's profitability. Required For a typical $240,000 investment in equipment with a five-year life and no salvage value, determine the present value of the advantage resulting from the use of double-declining balance depreciation as opposed to straight-line depreciation. Assume an income tax rate of 21% and a discount rate of 20%. Also assume that there will be a switch from double-declining balance to straight-line depreciation in the fourth year. Note: Round your answers below to the nearest whole dollar. Present value of double-declining balance tax shield $ Present value of straight-line tax shield x $ x Advantage of double-declining balance depreciation $

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

10th Edition

ISBN:9781337902571

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter12: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 11P: REPLACEMENT ANALYSIS St. Johns River Shipyards is considering the replacement of an 8-year-old...

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Problem 1: American Company is considering a new product whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero-salvage value, and no change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other American products and would reduce their pre-tax annual cash flows. What is the project's NPV? IRR? Briefly discuss the results. 10.0% -$5,000 $80,000 WACC Pre-tax cash flow reduction for other products (cannibalization) Investment cost (depreciable basis) Annual sales revenues Annual operating costs (excl. depreciation) Tax rate $67,500 -$25,000 35.0%
Payback; ARRPortsmouth Port Services creates and maintains shipping channels at various ports around the world. The company is considering the purchase of a $72,000,000 ocean-going dredge that has a five-year life and no salvage value. The company depreciates assets on a straight-line basis. This equipment’s expected annual cash flow on a before-tax basis is $18,600,000. Ports-mouth requires that an investment be recouped in less than five years and have a pre-tax accounting rate of return of at least 18 percent.a. Compute the payback period for this equipment.Note: Round your answer to one decimal place (i.e. round 4.3555 to 4.4).Payback period Answer yearsb. Compute the accounting rate of return for this equipment.Note: Round percentage to one decimal point (i.e. round 4.555% to 4.6%).Accounting rate of return Answer%c. Is the equipment an acceptable investment for Portsmouth? Answer
4. Analysis of a replacement project At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best financial decision for the company. Price Co. is considering replacing an existing piece of equipment. The project involves the following: • The new equipment will have a cost of $9,000,000, and it is eligible for 100% bonus depreciation so it will be fully depreciated at t = 0. • The old machine was purchased before the new tax law, so it is being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left ($50,000 per year). • The new equipment will have a salvage value of $0 at the end of the project's life (year 6). The old machine has a current salvage value (at year 0) of $300,000. • Replacing the old machine will require an investment in net…
Required information [The following information applies to the questions displayed below.] Peng Company is considering an investment expected to generate an average net income after taxes of $1,950 for three years. The investment costs $45,000 and has an estimated $6,000 salvage value. Compute the accounting rate of return for this investment; assume the company uses straight-line depreciation. Choose Numerator: 1 1 Accounting Rate of Return Choose Denominator: G O
4. Analysis of a replacement project At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best financial decision for the company. Price Co. is considering replacing an existing piece of equipment. The project involves the following: • The new equipment will have a cost of $2,400,000, and it is eligible for 100% bonus depreciation so it will be fully depreciated at t = 0. • The old machine was purchased before the new tax law, so it is being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left ($50,000 per year). • The new equipment will have a salvage value of $0 at the end of the project's life (year 6). The old machine has a current salvage value (at year 0) of $300,000. • Replacing the old machine will require an investment in net operating working…
8. Analysis of a replacement project Aa Aa At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best financial decision for the company. Johnson Co. is considering replacing an existing piece of equipment. The project involves the following: The new equipment will have a cost of $1,800,000, and it will be depreciated on a straight-line basis over a period of six years (years 1-6). • The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left ($50,000 per year). The new equipment will have a salvage value of $0 at the end of the project's life (year 6). The old machine has a current salvage value (at year 0) of $300,000. Replacing the old machine will require an investment in net working capital (NWC) of $60,000 that will be…
SeyLamb Footwear is considering the purchase of a new leather stitching machine to replace an existing machine. Assumed a required rate of return of 10% and a 50% tax rate. The company has a policy of charging depreciation on straight line method. No capital gain taxes are assumed. The following information relates to the project. Project Kuk Project Kak Initial Cash outlay 100,000 140,000 Salvage value Nil 20,000 Earnings before depreciation and taxes: Year 1 25,000 40,000 2 25,000 40,000 3 25,000 50,000 4 25,000 60,000 5 25,000 20,000 Required For each project calculate: (i) Pay-back Period (ii) Internal Rate of Return (iii)Profitability Inde
Consider a firm that has invested in a 5-year project. It faces a 40% corporate tax rate and its investment belongs to the CCA class with a 30% depreciation rate. A new "take care of equipment" program implemented by the firm allowed it to increase the salvage value of the equipment by $20,000. What was the effect of this program on NPV if the project's discount rate is 12%? $6,809 $8,106 $9,714 $11,349
ces Finch Manufacturing Company has an opportunity to purchase some technologically advanced equipment that will reduce the company's cash outflow for operating expenses by $1,280,000 per year. The cost of the equipment is $6,820,160.00. Finch expects it to have a 9-year useful life and a zero salvage value. The company has established an investment opportunity hurdle rate of 11 percent and uses the straight-line method for depreciation. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Calculate the internal rate of return of the investment opportunity. Note: Do not round intermediate calculations. b. Indicate whether the investment opportunity should be accepted. a. Internal rate of return b. Should the investment opportunity be accepted? % 4
3. Analysis of a replacement project At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best financial decision for the company. Price Co. is considering replacing an existing piece of equipment. The project involves the following: • The new equipment will have a cost of $9,000,000, and it will be depreciated on a straight-line basis over a period of six years (years 1–6). • The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left ($50,000 per year). • The new equipment will have a salvage value of $0 at the end of the project's life (year 6). The old machine has a current salvage value (at year 0) of $300,000. • Replacing the old machine will require an investment in net working capital (NOWC) of $50,000 that…
8. Analysis of a replacement project At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best financial decision for the company. Price Co. is considering replacing an existing piece of equipment. The project involves the following: • The new equipment will have a cost of $600,000, and it will be depreciated on a straight-line basis over a period of six years (years 1-6). • The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left ($50,000 per year). • The new equipment will have a salvage value of $0 at the end of the project's life (year 6). The old machine has a current salvage value (at year 0) of $300,000. • Replacing the old machine will require an investment in net working capital (NWC) of $45,000 that will be recovered…
Use excel The Lumber Yard is considering adding a new product line that is expected to increase annual sales by $238,000 and cash expenses by $184,000. The initial investment will require $96,000 in fixed assets that will be depreciated using the straight-line method to a zero book value over the 6-year life of the project. The company has a marginal tax rate of 32 percent. What is the annual value of the depreciation tax shield?