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Calamity Cauliflower Corporation is considering undertaking a capital project, The company would have to commit $24,000 of working capital in addition to an immediate outlay of $160,000 for new equipment. The project ts expected to generate $100,000 of annual income for 10 years. At the end of that time, the new equipment, which will be depreciated on a straight-line basis, is expected to have a salvage value of $10,000. The existing equipment that would be sold to make room for the project has a histoncal cost of $220,000 and accumulated depreciation of $208,000. It has an estimated remaining useful life of 2 years and the remaining book value is being depreciated on a straight-line basis. A scrap dealer has agreed to buy it for $8,000. The company's effective tax rate is 40%. Calamity Cauliflowers expected additional depreciation tax shield for the first year of the project is?
Correct : C
The new equipment has a depreciable base of $150,000 ($160,000 historical cost- $10,000 estimated salvage value), and has an estimated 1 0-year useful life, so annual depreciation expense is expected to be '$15,000. The old equipment has a depreciable base of $4,000 ($12,000 book value --- $8,000 salvage value) being depreciated on a straight-line basis over the remaining useful life o12 years results in $2,000 depreciation expense for the next 2 years. The depreciation tax shield for the first year is thus the difference in the two depreciation expense amounts times the tax rate [($15,000-$2,000) x .40 = $5,200].
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Calamity Cauliflower Corporation is considering undertaking a capital project. The company would have to commit $24 .000 of working capital in addition to an immediate outlay' of $160,000 for new equipment. The project is expected to generate $100,000 of annual income for 10 years. At the end of that time, the new equipment, which will be depreciated on a straight-line basis, is expected to have a salvage value of $10,000. The existing equipment that would be sold to make room for the project has a historical cost of $220,000 and accumulated depreciation of $208,000. It has an estimated remaining useful life of 2 years and the remaining book value is being depreciated on a straight-line basis.A scrap dealer has agreed to buy it for $8,000. The company's effective tax rate is 40%. Calamity Cauliflower's expected depreciation tax shield for the final year of the project is
Correct : A
The old equipment has a remaining useful life of two years, after which it will be fully depreciated and no longer generating depreciation expense. Thus, the depreciation tax shield in the project's last year consists only of the annual depreciation expense on the new equipment [($160,000 historical cost '' $10,000 estimated salvage value) 10 years
$15,000] Limes the tax rate (.40), or $6,000.
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Calamity Cauliflower Corporation is considering undertaking a capital project. The company would have to commit $24,000 of working capital in addition to an immediate outlay of $160,000 for new equipment. The project is expected to generate $100.000 of annual income for 10 years. At the end of that time, the new equipment, which will be depreciated on a straight-line basis, is expected to have a salvage value of $10,000. The existing equipment that would be sold to make room for the project has a historical cost of $220,000 and accumulated depreciation of $208,000. It has an estimated remaining useful life of 2 years and the remaining book value is being depreciated on a straight-line basis A scrap dealer has agreed to buy it for $8,000. The company's effective tax rate is 40%. Calamity Cauliflowers expected net cash inflow for the first year of the project is
Correct : B
The annual expected net cash inflow from a capital project consists of the after-tax cash inflow from operations {f$100.000 gross cash inflow---($100,000 x .40) income tax expense] = $60,000} plus the depreciation tax shield [($15,000 annual depreciation expense on new equipment ---$2,000 annual depreciation expense on old equipment) x .40 $5.2O0],_or $65,200.
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Calamit4' Cauliflower Corporation is considering undertaking a capital project. The company would have to commit $24,000 of working capital in addition to an immediate outlay of $160,000 for new equipment. The project is expected to generate $100,000 of annual income for 10 years. At the end of that time, the new equipment, which will be depreciated on a straight-line basis, is expected to have a salvage value of $10,000. The existing equipment that would be sold to make room for the project has a historical cost of $220,000 and accumulated depreciation of $208,000. It has an estimated remaining useful life of 2 years and the remaining book value is being depreciated on a straight-tine basis. A scrap dealer has agreed to buy it for $8,000. The company's effective tax rate is 40%. Calamity Cauliflower's expected total cash inflow in the final year of the project is?
Correct : B
The expected total cash inflow in the final year of the project consists of(1) $60,000 of cash flows from ongoing operations [$100,000 gross cash inflow x (1.0--- .40 tax rate)], (2) a $6,000 depreciation t shield [($15,000 annual depreciation expense on new equipment) x .40], (3) the after-tax cash inflow from disposal of the new equipment, in this case $6,000 [$10,000 disposal value x (1.0--- .40 tax rate)], and (4) recovery of the working capital set aside for the project ($24 000). The expected total cash inflow in the final year of the project is thus $96,000 ($6O.O00 + $6,000 + $6,000 + $24,000).
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The management of Pelican, Inc. is evaluating a proposed acquisition of a new machine at a purchase price of $180,000 and with installation costs of $10,000. A $9,000 increase in working capital will be required. The machine Will have a useful life of four years, after which it can be sold for $30,000. The estimated annual incremental operating revenues and cash operating expenses are $450,000 and $300.000, respectively, for each of the four years. Pelican's effective income tax rate is 40%. and the cost of capital is 12%. Pelican uses straight-line depreciation for both financial reporting and income tax purposes. If the project is accepted, the estimated incremental after-tax operating cash flows at the end of the first year wilt be?
Correct : B
The estimated incremental after-tax operating cash flows for each year of a capital project consist of two components: the after-tax cash inflows from operations and the depreciation tax shield arising from me purchase of new equipment. The first of these for Pelican can be calculated as follows:
Pelican's total incremental after-tax operating cash flows for each year of the project's
life is thus $106,000 ($90,000 + $16,000).
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