Oz Corp. Learning Activity

A. Oz Corp. is now in the final year of a project. The equipment originally cost $9400, and the asset has been 75% depreciated. Oz can sell the used equipment today for $1000, and its tax rate is 35%. The equipment's after-tax net salvage value is $_________.

B. Oz Corp. is now considering a project which would involve the purchase of new manufacturing equipment at a cost of $8400. The equipment would be depreciated on a straight-line basis to a book value of $700 over its 5-year useful life. The firm's marginal tax rate is 35%. The amount of the annual depreciation tax shield that should be included as part of the project's cash flows would be $_______.

C. Oz Corp's new project, Project M, will require a $2200 increase in Inventories up front, and will simultaneously cause Accounts Payable to increase by $1600. The net cash flow impact of these changes in year 0 should be recorded as $_______ in the project's cash flow table.

D. Another new project involves the purchase of a $9000 food processing machine. The machine would be depreciated on a straight-line basis over its 3-year useful life to a book value of $300. At the end of the life of the project (at the year 3 point), the machine will be sold for an estimated $800. The project will cause an increase in Sales of $7000 in each of years 1 through 3. It is also expected to enhance efficiencies and reduce operating expenses by $1000 in each of years 1 through 3. The project will require an increase in Accounts Receivable of $1500 and an increase in Accounts Payable of $800 up front. The project's impact on these accounts is expected to disappear at project end (in year 3). The firm's marginal tax rate is 40%, and its WACC is 12%. The NPV of this project is $_________.

E. A stock will pay dividends of $1.30 four years from today, $1.50 five years from today, and $2.20 six years from today. There will be no dividend payments prior to year 4. After year 6, the growth rate in dividends per year is expected to be 6% forever. The required return on the stock is 11%. P3, the price of the stock 3 years from now, should be $_____.