***** PLEASE PROVIDE SOLUTION AND ANSWER (A-E) *****

1. a) A project requires an initial investment of $5 million and will yield operating cash flows of $1.5 million per year for the next 10 years. At the end of 10 years, the projects assets can be divested for $250,000. The marginal tax rate is 40%, and the CCA rate is 30%. If the required rate of return is 12%, what is the present value of the CCA tax shields?

a. $1,352,040.82

b. $1,342,381.62

c. $1,329,042.73

d. $1,210,537.92

e. $1,049,551.30

1. b) Jabba-Dabba-Doo Inc. renovated its warehouses exactly two years ago at a cost of $3 million. The renovations were considered leasehold improvement, and the cost was therefore subject to straight-line depreciation for tax purposes. The firm will not need to renovate the warehouses for another three years (from today). Given that the firms marginal tax rate is 35% and required return is 11%, what is the present value of the remaining depreciation tax shields on the leasehold improvement? Ignore the half-year rule, and round your answer to the nearest dollar.

a. $776,138

b. $359,630

c. $513,180

d. $630,000

e. $210,000

1. c) For part a, describe what would happen to the asset if you used straight-line depreciation. For part b, describe what would happen to the asset if you used CCA.

Explanation: