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The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for $90,000; twill cost $6,000 to transport to Moore's plant and $9,000 to install. It is estimated that the machine will last 10 years, and it is expected to have an estimated salvage value of $5,000. Over its 10-year life, the machine is expected to produce 2,000 units per year with a selling price of $500 and combined material and labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Moore ha a marginal tax rate of 40%. What is the net cash flow for the tenth year of the project that Moore Corporation should use in a capital budgeting analysis?
Answer : D
The company will receive net cash inflows of $50 per unit ($500 selling price --- $450 of variable costs), or a total of $100,000 per year. This amount will be subject to taxation, as will the $5,000 gain on sale of the investment, bringing taxable income to $105,000. No depreciation will be deducted in the tenth year because the asset was fully depreciated after 5 years. Because the asset was fully depreciated (book value was zero), the $5,000 salvage value received would be fully taxable. After income taxes of $42,000 ($105,000 x 40%), the net cash flow in the tenth year is $63,000 ($105,000 ---$42,000).
Metrejean Industries is analyzing a capital investment proposal for new equipment to produce a product over the next 8 years. At the end of 8 years, the equipment must be removed from the plant and will have a net caring amount of $0. a tax basis of $150,000. a cost to remove of $80,000. and scrap salvage value of $20,000. Metrejean's effective tax rate is 40%. What is the appropriate enc$-of-life'' cash flow related to these items that should be used in the analysis?
Answer : C
The tax basis of $150,000 and the $80,000 cost to remove are deductible expenses, but the $20,000 scrap value is an offsetting cash inflow. Thus, the taxable loss is $210,000 ($150,000 + $80,000 ---$20,000). At a 40% tax rate, the $210,000 loss will produce a tax savings (inflow) of $84,000. According. the final cash flows will consist of an outflow of $80,000 (cost to remove) and inflows of $20,000 (scrap) and $84,000 (tax savings), a net inflow of $24,000.
Kore Industries is analyzing a capital investment proposal for new equipment to produce a product over the next 8 years. The analyst is attempting to determine the appropriate ''end-of-life cash flows for the analysis. At the end of 8 years, the equipment must be removed from the plant and will have a net book value of zero, a tax basis of $75,000, a cost to remove of $40,000. and scrap salvage value of $10,000. Kore's effective tax rate is 40%. Valiant is the appropriate endow-life cash flow related to these items that should be used in the analysis?
Answer : C
The tax basis of $75,000 and the $40,000 cost to remove can be written off. However, the - $10,000 scrap value is a cash inflow. Thus, the taxable loss is $105,000 ($75,000 loss on disposal + $40,000 expense to remove ---$10,000 of inflows). At a 40% tax rate, the $ 105.000 loss will produce a tax savings (inflow) of $42,000. The final cash flows will consist of an outflow of $40,000 (cost to remove) and inflows of $10,000 (scrap) and $42,000 (tax savings), or a net inflow of $12,000.
The Dickens Corporation is considering the acquisition of a new machine at a cost of $180,000. Transporting the machine to Dickins' plant will cost $1 2.000. Installing the machine will cost an additional $18,000. It has a 10-year life and is expected to have a salvage value of $10,000. Furthermore, the machine is expected to produce 4.000 units per year with a selling price of $500 and combined direct materials and direct labor costs of $450 per unit. Federal tax regulations permit machines of this ripe to be depreciated using the straight-line method over 5 years with no estimated salvage value. Dickens has a marginal tax rate of 40%. What is the net cash outflow at the beginning of the first year that Dickens should use in a capital budgeting analysis?
Answer : D
Delivery and installation costs are essential to preparing the machine for its intended use. Thus the company must initially pay $2 10.000 for the machine, consisting of the invoice price of $180,000. the delivery costs of $1 2,000, and the $18,000 of installation costs.
The Dickins Corporation is considering the acquisition of a new machine at a cost of $ 180.000. Transporting the machine to Dickins' plant will cost $12,000. Installing the machine will cost an additional $18,000. It has a 10-year life and is expected to have a salvage value of $10,000. Furthermore, the machine is expected to produce 4,000 units per year with a selling price of $500 and combined direct materials and direct labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value, Dickins has a marginal tax rate of 40%. What is the net cash flow for the third year that Dickins should use in a capital budgeting analysis?
Answer : A
The company will receive net cash inflows of $50 per unit ($500 selling price --- $450 variable costs), a total of $200,000 per year for 4,000 units. This amount will be subject to taxation, However, for the first 5 years, a depreciation deduction of $42,000 per year ($210,000 cost + 5 years) will be available. Thus, annual taxable income will be $158,000 ($200,000 ---$42,000). At a 40% tax rate, income tax expense will be $63,200, and the net cash inflow will be $136,800 ($200,000 --- $63200).
