Question
a) Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $17.5 million, of which 75% has been depreciated. The
a) Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $17.5 million, of which 75% has been depreciated. The used equipment can be sold today for $5 million, and its tax rate is 25%. What is the equipment's after-tax net salvage value? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar
b) Computer Consultants Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's MIRR? Note that a project's MIRR can be less than the cost of capital (and even negative), in which case it will be rejected.
r = | 10.00% | |||
Year | 0 | 1 | 2 | 3 |
Cash flows | $1,000 | $450 | $450 | $450 |
c) Your new employer, Freeman Software, is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33.33%, 44.45%, 14.81%, and 7.41% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project's 10-year expected life. What is the Year 1 cash flow?
Equipment cost (depreciable basis) | $65,000 |
Sales revenues, each year | $60,000 |
Operating costs (excl. deprec.) | $25,000 |
Tax rate | 25.0% |
d) Century Roofing is thinking of opening a new warehouse, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new warehouse. The equipment for the project would be depreciated by the straight-line method over the project's 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No new working capital would be required, and revenues and other operating costs would be constant over the project's 3-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.)
Project cost of capital (r) | 10.0% |
Opportunity cost | $100,000 |
Net equipment cost (depreciable basis) | $65,000 |
Straight-line deprec. rate for equipment | 33.333% |
Sales revenues, each year | $123,000 |
Operating costs (excl. deprec.), each year | $25,000 |
Tax rate | 25% |
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