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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

$4,000,000  2,000,000  500,000 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.

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