1.

a. If Company XYZ plans to launch a new production line, and in year 1, will have sales revenue $10,000,000, operating cost is 70% of the sales revenue, depreciation is $2,000,000, and tax rate is 40%, what is the Companys projected cash flow in year 1?

b. If the Companys launch of the new production line will cause the exit of an existing production line that can generate $1,000,000 operating income before tax, how much will be the Companys projected cash flow in year 1, if we take this opportunity cost or cannibalization into the consideration?

c. If the tax rate fell to 30%, what will be the projects cash flow?

2.

If the Company AD has an equipment with original cost $20,000,000, depreciation is 80% of the cost of equipment, and the book value is $4,000,000. At the end of its physical life time year, if the Company can sell the equipment for $5,000,000 in the market, what is the gain on sale? What is the after tax (AT) net salvage value if the tax rate is 40%?

3.

For two projects A and B, both have initial capital outlay of $20,000 at T=0, Project A has 6 year physical life time with annual cash flow of $6,000. Project B has 3 year physical life time with same $6,000 annual cash flow. If the discount rate is 10%, which project should be chosen if using EEA (Equivalent Annual Annuity) approach to calculate?