Use the following information for questions 15 and 16.

North Haverbrook is following the lead of Sydney and dismantling its failed monorail. The

town has given the monorail to Langley Construction (LC). In exchange for receiving the

monorail land for free, Langley Construction must bear all the costs of dismantling the

monorail. LC had planned to simply turn the land into retail space. However, it is now

evaluating a project to instead turn the monorail stations into a marginally more efficient

means of transportation via an as-needed pogo stick rental service. The pogo stick project

has the following characteristics:

Dismantling the monorail stations is expected to cost $7 million this year.

Building the retail space will cost $3 million this year.

The pogo stick rental locations will cost the same as the retail space.

However, the firm will need to spend $1 million acquiring pogo sticks.

Retail space will be depreciated at prime cost over a useful life of 30 years.

Pogo sticks will be depreciated at prime cost over a useful life of 4 years.

At the end of year 3, the firm expects to sell its entire stock of pogo sticks

for $300,000.

The Pogo Stick project by itself is expected to generate $15,000,000 in pretax

profits. When combined with the rest of LC's businesses, LC will

generate $45,000,000 in pre-tax profits.

Tax rates for Langley Construction are given in the following table:

Taxable Income ($) Tax Rate

0 to 10 million 25%

10 to 25 million $2.5 million + 30% of the amount over $10 million

25 to 50 million $7 million + 38% of the amount over $25 million

More than 50 million $16.5 million + 40% of the amount over $50 million

15. What is the initial incremental capital expenditure of the pogo stick project?

a. $4 million

b. $1 million

c. $7 million

d. $11 million

e. $3 million

16. What is the after-tax salvage value of the pogo sticks in year 3, expressed as a time 3

value (i.e. do not give the present value)?

a. $186,000

b. $210,000

c. $281,000

d. $300,000

e. $285,000