(1) Assume a firm has earnings before depreciation and taxes of $560,000 and depreciation of $260,000.

a.If it is in a 35 percent tax bracket,compute its cash flow.

b.If it is in a 20 percent tax bracket, computeits cash flow.

(2) Assume a corporation has earnings before depreciation and taxes of $102,000, depreciation of $40,000, and that it has a 35 percent tax bracket.

a.Compute its cash flow using the following format.(Input all answers as positive values.)

b.How much would cash flow be if there were only $12,000 in depreciation? All other factors are the same.

c.How much cash flow is lost due to the reduced depreciation from $40,000 to $12,000?

(3) Assume a $90,000 investment and the following cash flows for two alternatives.

Year Investment A Investment B

1 $30,000 $30,000

2 25,000 30,000

3 20,000 40,000

4 30,000

5 25,000

a.Calculate the payback for investment A and B.(Round your answers to 2 decimal places.)

b.Which investment would you select under the payback method?

Investment A or Investment B

c.If the inflow in the fifth year for Investment A was $25,000,000 instead of $25,000, would your answer change under the payback method?

Yes or No

(4) X-treme Vitamin Company is considering two investments, both of which cost$42,000. The cash flows are as follows:

Year Project A Project B

1 $44,000 $42,000

2 15,000 14,000

3 15,000 20,000

UseAppendixBfor an approximate answer but calculate your final answer using the formula and financial calculator methods.

a-1.Calculate the payback period for Project A and Project B.(Round your answers to 2 decimal places.)

Payback Period

Project A ___ year(s)

Project B ___ year(s)

a-2.Which of the two projects should be chosen based on the payback method?

Project A Project B

b-1.Calculate the net present value for Project A and Project B. Assume a cost of capital of 8 percent.(Do not round intermediate calculations and round your final answers to 2 decimal places.)

Net Present Value

Project A ____

Project B ____

b-2.Which of the two projects should be chosen based on the net present value method?

Project B Project A

c.Should a firm normally have more confidence in the payback method or the net present value method?

Net present value method

Payback method