Question
1. The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service: Projected
1. The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service:
Projected sales | $25 million |
Operating costs (not including depreciation) | 7 million |
Depreciation | 6 million |
Interest expense | 5 million |
The company faces a 35% tax rate. What is the project's operating cash flow for the first year (t = 1)? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
2.Wendy's boss wants to use straight-line depreciation for the new expansion project because he said it will give higher net income in earlier years and give him a larger bonus. The project will last 4 years and requires $800,000 of equipment. The company could use either straight-line or the 3-year MACRS accelerated method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life (ignore the half-year convention for the straight-line method). The applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. The company's WACC is 10%, and its tax rate is 45%. MACRS depreciation produces a higher NPV than straightline depreciation. How much higher would the NPV be through MACRS than straightline?
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