Principles of Finance
Week 10 Questions
- The MacCauley Company has sales of $200 million and total expenses (excluding depreciation) of $130 million. Straight-line depreciation on the company’s assets is $15 million, and the maximum accelerated depreciation allowed by law is $25 mil- lion. Assume that all taxable income is taxed at 40 percent. Assume also that net working capital remains constant.
- Calculate the MacCauley Company’s after-tax operating cash flow using both straight-line and accelerated depreciation.
b. Assuming that the company uses straight-line depreciation for book purposes and accelerated depreciation for tax purposes, show the income statement reported to the stockholders. What is the after-tax operating cash flow under these circumstances?
5. Anew machine costing $100,000 is expected to save the McKaig Brick Company $15,000 per year for 12 years before depreciation and taxes. The machine will be depreciated on a straight-line basis for a 12-year period to an estimated salvage value of $0. The firm’s marginaltaxrateis40percent.Whataretheannualnet cash flows associated with the purchase of this machine? Also, compute the net investment (NINV) for this project.
6. The Jacob Chemical Company is considering building a new potassium sulfate plant. The following cash outlays are required to complete the plant:
Year Cash Outlay
- Jacob’s cost of capital is12percent, and its marginal tax rate is 40 percent. a. Calculate the plant’s net investment (NINV).
- What is the installed cost of the plant for tax purposes
7. The Taylor Mountain Uranium Company currently has annual cash revenues of $1.2 million and annual cash expenses of $700,000. Depreciation amounts to $200,000 per year. These figures are expected to remain constant for the foreseeable future (at least 15 years). The firm’s marginal tax rate is 40 percent. A new high-speed processing unit costing $1.2 million is being considered as a potential investment designed to increase the firm’s output capacity. This new piece of equipment will have an estimated usable life of 10 years and a $0 estimated salvage value. If the processing unit is bought, Taylor’s annual revenues are expected to increase to $1.6 million and annual expenses (exclusive of depreciation) will increase to $900,000. Annual depreciation will increase to $320,000. Assume that no increase in net working capital will be required as a result of this project. Compute the project’s annualnetcashflowsforthenext10years, assuming that the new processing unit is purchased. Also, compute the net investment (NINV) for this project.
***** ****Attached: Week 10 Assignment_Fin.doc