1. Summer Tyme, Inc., is considering a new 4-year expansion project that requires an initial fixed asset investment of $2.808 million. The fixed asset will be depreciated straight-line to zero over its 4-year tax life, after which time it will be worthless. The project is estimated to generate $2,496,000 in annual sales, with total costs of $998,400.

Required:

If the tax rate is 35 percent, what is the OCF for this project?

2. An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $14,580,000 and will be sold for $3,240,000 at the end of the project.

Required:

If the tax rate is 31 percent, what is the aftertax salvage value of the asset? NOTE: If an asset is sold at either a gain or loss over book value, taxes will be affected.

3. Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land 6 years ago for $8 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities to another company for $40,000 a year. If the land were sold today, Parker & Stone would net $9.8 million. The company wants to build its new manufacturing plant on this land; the plant will cost $13.2 million to build, and the site requires $784,000 worth of grading before it is suitable for construction.

Required :

What is the proper cash flow amount to use as the initial investment (that is the Time=0 cash flow) in assets when evaluating this project?