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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).
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 Es 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 tenth year of the project that Dickins 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), a total of $200.000 per year for 4.000 units. This amount will be subject to taxation, as will the $10,000 gain on sale of the irwestrnent, resetting in taxable income of $210,000. 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 $0), the $10,000 received as salvage value is fully taxable. At 40%, the tax on $210,000 is $84,000. After subtracting $84000 of tax expense from the $210,000 of inflows the net inflows amount to $126,000.
On January 1. Crane Company will acquire a new asset that costs $400,000 and is anticipated to have a salvage value of $30,000 at the end of 4 years. The new asset
* Qualifies as 3-year property under the Modified Accelerated Cost Recovery System (MACRS).
* Will replace an old asset that currently has a tax basis of $80,000 and can be sold now for $60,000.
* Will continue to generate the same operating revenues as the old asset ($200 .000 per year). However, savings in operating costs will be experienced as follows: a total of $ 120.000 in each of the first 3 years and $90,000 in the fourth year. Crane is subject to a 40% tax rate and rounds all computations to the nearest dollar. Assume that any gain or loss affects the taxes paid at the end of the year in which it occurred. The company uses the net present value method to analyze projects using the following factors and rates:
The present value of the depreciation tax shield for the fourth year MACRS depreciation of Crane Company's new asset is?
Answer : C
The firm will be able to deduct 7% of the asset's cost during the fourth year of the asset's life. The deduction is $28,000 ($400,000 x 7%), and the tax savings is $11,200 ($28,000 x 40%). The present value of this amount is $6,608 ($11,200 x .59 PV of $1 at 14% for four periods).
On January 1, Crane Company will acquire a new asset that costs $400,000 and is anticipated to have a salvage value of $30,000 at the end 014 years. The new asset
* Qualifies as 3-year property under the Modified Accelerated Cost Recovery System (MACRS).
* Will replace an old asset that currently has a tax basis of $80,000 and can be sold now for $60,000.
* Will continue to generate the same operating revenues as the old asset ($200,000 per year). However, savings in operating costs will be experienced as follows: a total of $1 20.000 in each of the first 3 years and $90,000 in the fourth year. Crane is subject to a 40% tax rate and rounds all computations to the nearest dollar. Assume that any gain or loss affects the taxes paid at the end of the year in which it occurred. The company uses the net present value method to analyze projects using the following factors and rates:
The discounted net-of-tax amount that should be factored into Crane Company's analysis for the disposal transaction is?
Answer : C
The old asset can be sold for $60,000, producing an immediate cash inflow of that amount. This sale will result in a $20,000 loss for tax purposes ($80,000 --- $60,000). At a 40% tax rate, the loss, which is deemed to affect taxes paid at the end of the first year, will provide a tax savings (cash inflow) of $8,000. Because the $8,000 savings is treated as occurring at the end of the first year, it must be discounted. This discounted (present) value is $7,040 ($8,000 x .88 PV of $1 at 14% for one period). Combining the $60,000 initial inflow with the $7,040 of tax savings results in a net-of-tax amount of $67,040.
The accounting rate of return?
Answer : B
The accounting rate of return (also called the unadjusted rate of return or book value rate of return) is calculated by dividing the increase in accounting net income by the required investment. Sometimes the denominator is the average investment rather than the initial irstment This method ignores the time value of money hand focuses on income as opposed to cash flows.
