North Haverbrook is following the lead of Sydney and dismantling its failed monorail. The town has given the monorail to Langley Construction (LC). In exchange for receiving the former monorail land for free, Langley Construction must bear all the costs of dismantling the monorail. LC had originally planned to simply turn the land into retail space. However, it is now evaluating a project to instead turn the monorail stations into a marginally more efficient means of transportation via an as-needed pogo stick rental service The pogo stick project has the following characteristics: Dismantling the monorail stations is expected to cost $7.8 million this year Building the retail space would cost $2.2 million this year The pogo stick rental locations would cost the same as the retail space. However, the firm will need to spend $ 1.5 million acquiring new pogo sticks if it pursues this project Retail space would be depreciated at prime cost over a useful life of 25 years Pogo sticks would be depreciated at prime cost over a useful life of 6 years At the end of year 5, the firm expects to sell its entire stock of pogo sticks for $304,000 The Pogo Stick project by itself is expected to generate $15, 400,000 in pre-tax operating profits annually. When these profits are combined with the rest of their business, the firm will generate $48,000,000 in total pre-tax operating profits. The marginal tax brackets for Langley Construction are given in the following table: Taxable income $ Tax Rate 0 to 10 million 25.0% 10 to 25 million $2.5 million + 30.0% of the amount over $10 million 25 to 50 million $7 million + 33.5% of the amount over $25 million More than 50 million $16.5 million + 40.0% of the amount over $50 million million (a) The incremental capital expenditure of the pogo stick project at trois $11.5 (Round your answer to one decimal place) Your last answer was interpreted as follows: 11.5 Incorrect answer To determine the initial (att = 0) incremental capital expenditure of the pogo stick project you need to understand what is an incremental cash flow. It is an actual cash flow that will only occur if the pogo stick project is undertaken. Hence, ask yourself the following questions: Whether the cost of dismantling the monorail stations only occurs when the company undertake the pogo stick project? . Whether the cost of building the pogo stick rental locations only occurs when the company undertake the pogo stick project? Note: this cost is the same as the cost of building the retail space. . Whether the cost of acquiring pogo sticks only occurs when the company undertake the pogo stick project? if the answers are yes, they are initial incremental cash flows and if the answers are no, they are not (b) The after-tax salvage value of the pogo sticks in year 5. expressed as a time 5 value (i.e. do not give the present value) is $ 320545 (Round your answer to the nearest dollar) Your last answer was interpreted as follows: 320545 Incorrect answer First, you need to calculate depreciation expense per year. Annual depreciation - Original cost / Useful life of pogo sticks where Original cost = $1.5 million Useful life of pogo sticks = 6 years Next, you determine the carrying value of pogo sticks at the time of the sale: Carrying value - Original cost - (annual depreciation number of years owned) where Original cost = $1.5 million Annual depreciation: from step 1 Number of years owned = 5 years Finally, you can get the total incremental cash flow from selling pogo sticks as follows: After-tax salvage value of the sale = Sale price - (Sale price - Carrying value)"Tax rate where Sale price = $304,000 Carrying value from step 2 To determine the marginal tax rate that the company would use for the sale of pogo sticks, you need to look at the marginal tax bracket table given in the question First, determine the level of pre-tax income that the company earn without having the pogo stick project. Next, from the table, the marginal tax rate is the rate that any additional dollar of taxable income above the pre-tax income without the project would be taxed