Question 1

Terminal cash flow Replacement decisionRussell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a newer, more sophisticated machine. The new machine will cost $203,000 and will require $30,400 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table for the applicable depreciation percentages).

A $23,000 increase in net working capital will be required to support the new machine. The firm's managers plan to evaluate the potential replacement over a 4-year period. They estimate that the old machine could be sold at the end of 4 years to net $13,000 before taxes; the new machine at the end of 4 years will be worth $71,000 before taxes. Calculate the terminal cash flow at the end of year 4 that is relevant to the proposed purchase of the new machine. The firm is subject to a 40% tax rate.

The terminal cash flow for the replacement decision is shown below:(Round to the nearest dollar.)

Proceeds from sale of new machine	$
Tax on sale of new machine
Total after-tax proceeds-new asset			$
Proceeds from sale of old machine	$
Tax on sale of old machine
Total after-tax proceeds-old asset			$
Change in net working capital
Terminal cash flow			$

spreadsheet.)

Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes
	Percentage by recovery year*
Recovery year	3 years	5 years	7 years	10 years
1	33%	20%	14%	10%
2	45%	32%	25%	18%
3	15%	19%	18%	14%
4	7%	12%	12%	12%
5		12%	9%	9%
6		5%	9%	8%
7			9%	7%
8			4%	6%
9				6%
10				6%
11				4%
Totals	100%	100%	100%	100%

Question 2

EBITlong dashEPS and capital structureData-Check is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate.

Source of capital	Structure A	Structure B
Long-term debt	$99,000 at 15.1% coupon rate	198,000 at 16.1% coupon rate
Common stock	4,400 shares	2,200 shares

a. Calculate two EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values.

b. Plot the two capital structures on a set of EBIT-EPS axes.

c. Indicate over what EBIT range, if any, each structure is preferred.

d. Discuss the leverage and risk aspects of each structure.

e. If the firm is fairly certain that its EBIT will exceed $80, 000, which structure would yourecommend? why?

a. Calculate two EBIT-EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values.

Complete the tables below using $50,000 and $60,000 EBIT:

	Structure A
EBIT	$	50,000
Less: Interest	$
Net profits before taxes	$
Less: Taxes	$
Net profit after taxes	$
EPS (4,400 shares)	$