Capital gains tax rate 0.15 Income tax rate 0.30 Straight line depreciation

1. A firm is considering purchasing a new asset. Use the information in the chart below to find the net cash outlay for this asset.

	0
Cost of New Asset	125,000
Installation Costs	0
Old Asset
Book Value	0
Proceeds on Sale	32,000
Initial Purchase Price	100,000
Decrease in Working Capital	7,000

Solve for the following values:

Outputs	Distribution	Tax Effects
Book Value	0.00
Capital Gain	32,000.00
Capital Loss	0.00
Recaptured Depreciation	100,000.00
Proceeds on Sale
Cost of New Asset
Installation Costs
Proceeds on Sale,Old Asset
Taxes on Proceeds on Sale
Decrease in Working Capital
Net Cash Outlay

Question 2: The firm is projecting the cash flows in the chart below for the asset above. Find the marginal operating cash flows for this asset.

Year	0	1	2	3
Revenues		138,000
Revenue Inflation Rate			9.00%	9.00%
Expenses		44,000
Expense Inflation Rate			5.00%	5.00%
Useful life	3
Operating Cash Flows, Old Asset		47,000	47,000	47,000

Solve for the following values:

Revenues

Operating Expenses

Depreciation Expense

Earnings Before Taxes

Taxes

Net Income

Depreciation Expense

Operating Cash Flow

Operating Cash Flow, Old Asset

Net Operating Cash Flows

Question 3:

At the end of Year 3, the asset purchased in Year 0 will be sold for $20,000. Find the terminal cash flow.

4. What is this project's IRR?

5. If the firm's cost of capital is 11%, should the firm invest in this asset? Justify your answer.