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Problem 1: Erosion cost and incremental cash flow Vonda is looking to introduce a new hybrid car in the US. Analysts estimate that the company

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Problem 1: Erosion cost and incremental cash flow Vonda is looking to introduce a new "hybrid" car in the US. Analysts estimate that the company will sell 12,000 of these new cars per year. The unit cost per car is $18,000 and they plan on selling the vehicle for $22,000. If current sales of Vonda's sedan, which costs $15,000 to produce and sells for $20,000, decrease from 25,000 units to 15,000 units per year, would this be a worthwhile move for Vonda? Calculate the erosion cost and incremental cash flow that would result if the company went ahead with the launch. Problem 2: Capital spending, depreciation and cash flow Skunk Boats, Inc. has just installed a new hydraulic lift system, which is being categorized as a 5-year class- life asset under MACRS. The total purchase cost plus installation amounted to $750,000. While Skunk Boats has always used straight-line depreciation in the past, their accountant, Tom Sawyer, is pushing the owner to use the MACRS rates this year. However, the owner seem since total depreciation under each method will still sum to $750,000 and be spread over 6 years - i.e., with the application of the "half-year" convention. Do you agree with the owner? Please explain by making the appropriate calculations. (Note: Skunk Boats uses a 10% hurdle rate and its effective tax rate is 30%) Table of Property Class and Recovery Period Property Class (Recovery Period) Types of Capital Assets 3 years Research equipment and specialty tools 5 years Computers, typewriters, copiers, duplicating machines, cars, light-duty trucks, qualified technological equipment, and other similar assets 7 years Office furniture, fixtures, most manufacturing equipment railroad track, and single-purpose agricultural and horticul tural structures 10 years 15 years 20 years 27.5 years Equipment used in petroleum refining or in the manufacturing of tobacco products and certain food products Public utility properties, type 1 Public utility properties, type 2 Residential real property Office buildings, shopping centers, warehouses, and manufacturing facilities Railroad gradings and tunnel bores 39 years 50 years Table A-1. 3-, 5-, 7., 10-, 15-, and 20-Year Property Half-Year Convention Depreciation rate for recovery period 3-year 5-year 7-year 10-year 15-year Year 20-year 5001 33.33% 44.45 14.81 20.00% 32.00 19.20 11.52 11.52 14.29% 24.49 17.49 12.49 BOS 10.00% 18.00 14.40 11.52 9.22 3.750% 7.219 6.677 6.177 5.713 5.76 5.285 4.888 4.522 4.46 4.461 5.91 5.00 5.91 4.462 4.461 4.462 4.461 4.462 2.95 4.461 4.42 4.461 4.462 4.461 2 231

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