Questions on finance:

Q1.

The Jones Company has just completed the third year of a 5-year diminishing value recovery period for a piece of equipment it originally purchased for $296 000. The depreciation rate is 40%. a. What is the book value of the equipment? b. If Jones sells the equipment today for $78 000 and its tax rate is 30%, what is the after-tax cash flow from selling it? c. Just before it is about to sell the equipment, Jones receives a new order. It can take the new order if it keeps the old equipment. Is there a cost to taking the order and if so, what is it? Explain. (Assume the new order will consume the remainder of the machine's useful life.) a. The book value of the equipment after the third year is $ . (Round to the nearest dollar.) b. If Jones Company sells the equipment today for $78 000 and its tax rate is 30%, the total after-tax proceeds from the sale will be $ . (Round to the nearest dollar.) c. Just before it is about to sell the equipment, Jones receives a new order. It can take the new order if it keeps the old equipment. Is there a cost to taking the order and if so, what is it? Explain. (Select the best choice below.) O A. Yes, the cost of taking the order is the lost $63 936 in book value. O B. No, Jones already owns the machine, so there is no cost to using it for the order. O C. Yes, the cost of taking the order is the extra depreciation on the machine. O D. Yes, the cost of taking the order is the lost after-tax cash flow of $73 781 from selling the machine.Earnings forecast Project year 2 9 10 Sales revenue 30.000 30.000 30.000 - Cost of goods sold 30.000 18.000 18.000 18.000 18.000 = Gross profit 12.000 12.000 12.000 12.000 - General, sales and administrative expenses 1.632 1.632 - Depreciation 1.632 1.632 2.040 2.040 2.040 = Net operating profit 2.040 8.328 8.328 8.328 - Income tax 8.328 2.498 2.498 2.498 2.498 = Net profit 5.830 5.830 5.830 5.830All of the estimates in the report seem correct. You note that the consultants used straight-line depreciation for the new equipment that will be purchased today (year 0), which is what the accounting department recommended. They also calculated the depreciation assuming no salvage value for the equipment, which is the company's assumption in this case. The report concludes that because the project will increase earnings by $5.830 million per year for ten years, the project is worth $58.30 million. You think back to your glory days in finance class and realise there is more work to be done! First, you note that the consultants have not factored in the fact that the project will require $13.1 million in net working capital up front (year 0), which will be fully recovered in year 10. Next, you see they have attributed $1.632 million of selling, general and administrative expenses to the project, but you know that $0.816 million of this amount is overhead that will be incurred even if the project is not accepted. Finally, you know that accounting earnings are not the right thing to focus on! a. Given the available information, what are the free cash flows in years 0 to 10 that should be used to evaluate the proposed project? b. If the cost of capital for this project is 16%, what is your estimate of the value of the new project? a. The free cash flow for year 0 is $ million. (Round to three decimal places.) The free cash flow for years 1 to 9 is $ | million. (Round to three decimal places.) The free cash flow for year 10 is $ | million. (Round to three decimal places.) b. If the cost of capital for this project is 16%, the value of project is $ | million. (Round to three decimal places.) You accept the project. (Choose the best answer from the drop down menu.)You are a manager at Percolated Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $1.4 million for this report, and I am not sure their analysis makes sense. Before we spend the $20.4 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars)