EXAM 3 TOPIC 12 Flashcards
A company is looking to invest in new machinery. The cost of the machinery, including shipping and installation costs, is $34.75 million. The company has a buyer for the old machinery who is willing to pay $3.2 million. Currently the book value of the old machinery is $4.8 million. The company will also invest $2.9 million in additional inventory to sustain the higher levels of efficiency that come with the new machinery. If the company’s marginal tax rate is 39%, what is the initial outlay?
A company is looking to invest in new machinery. The cost of the machinery, including shipping and installation costs, is $34.75 million. The company has a buyer for the old machinery who is willing to pay $3.2 million. Currently the book value of the old machinery is $4.8 million. The company will also invest $2.9 million in additional inventory to sustain the higher levels of efficiency that come with the new machinery. If the company’s marginal tax rate is 39%, what is the initial outlay?
ACTF STANDS FOR
AFTER TAX CASH FLOW
EBIT STANDS FOR
EARNINGS BEFORE INTEREST AND TAXES
Motris Inc. is introducing a new product and has an expected change in EBIT of $870,000. This project will also produce $150,000 of depreciation per year. In addition, the project will cause changes to the following accounts:
· Increase of $20,000 in A/R
· Increase of $19,000 in Inventory
· Increase of $30,000 in A/P
Assuming a tax rate of 34 percent, calculate the project’s free cash flows.
EBIT FORMULA:
A company is looking to invest in new machinery. The cost of the machinery, including shipping and installation costs, is $34.75 million. The company has estimated that revenues will increase to $38.9 million in each of the next three years if the machinery is purchased. Costs (both variable and fixed) are also expected to increase to $10.2 million in each of the next three years. The company uses a standard straight-line depreciation method. In particular, the company will straight-line depreciate the machinery to $7.8 million over the three year life of the project. If the marginal tax rate is 39%, what will the differential cash flows be in each of the next three years?
A company is looking to invest in new machinery. The cost of the machinery, including shipping and installation costs, is $34.75 million. The company has estimated that revenues will increase to $38.9 million in each of the next three years if the machinery is purchased. Costs (both variable and fixed) are also expected to increase to $10.2 million in each of the next three years. The company uses a standard straight-line depreciation method. In particular, the company will straight-line depreciate the machinery to $7.8 million over the three year life of the project. If the marginal tax rate is 39%, what will the differential cash flows be in each of the next three years?
Incremental Earnings after Taxes (NI) / Net operating profit after tax (NOPAT):
A company is looking to invest in new machinery. The cost of the machinery, including shipping and installation costs, is $34.75 million. The company has estimated that revenues will increase to $38.9 million in each of the next three years if the machinery is purchased. Costs (both variable and fixed) are also expected to increase to $10.2 million in each of the next three years. The company uses a standard straight-line depreciation method. In particular, the company will straight-line depreciate the machinery to $7.8 million over the three year life of the project. If the marginal tax rate is 39%, what will the differential cash flows be in each of the next three years?
Annual Cash Flow:
A company is looking to invest in new machinery. The cost of the machinery, including shipping and installation costs, is $34.75 million. The company has estimated that revenues will increase to $38.9 million in each of the next three years if the machinery is purchased. Costs (both variable and fixed) are also expected to increase to $10.2 million in each of the next three years. The company uses a standard straight-line depreciation method. In particular, the company will straight-line depreciate the machinery to $7.8 million over the three year life of the project. If the marginal tax rate is 39%, what will the differential cash flows be in each of the next three years?
(NI)
Incremental Earnings after Taxes
(NOPAT)
Net operating profit after tax
tax formula:
A company is looking to invest in new machinery. The cost of the machinery, including shipping and installation costs, is $34.75 million. The company has estimated that revenues will increase to $38.9 million in each of the next three years if the machinery is purchased. Costs (both variable and fixed) are also expected to increase to $10.2 million in each of the next three years. The company uses a standard straight-line depreciation method. In particular, the company will straight-line depreciate the machinery to $7.8 million over the three year life of the project. If the marginal tax rate is 39%, what will the differential cash flows be in each of the next three years?
Differential Cash Flow formula:
A company is looking to invest in new machinery. The cost of the machinery, including shipping and installation costs, is $34.75 million. The company has estimated that revenues will increase to $38.9 million in each of the next three years if the machinery is purchased. Costs (both variable and fixed) are also expected to increase to $10.2 million in each of the next three years. The company uses a standard straight-line depreciation method. In particular, the company will straight-line depreciate the machinery to $7.8 million over the three year life of the project. If the marginal tax rate is 39%, what will the differential cash flows be in each of the next three years?
WC STANDS FOR
WORKING CAPITAL
total cash flow FORMULA:
A company is looking to invest in new machinery. The cost of the machinery, including shipping and installation costs, is $34.5 million. The initial outlay also includes an investment in net working capital of $4 million. The company has estimated that revenue will increase $38.9 million in each of the next three years if the machinery is purchased. Costs (both variable and fixed) are also expected to increase $10.2 million in each of the next three years. The company uses a standard straight-line depreciation method. In particular, the company will straight-line depreciate the machinery to zero over the three year life of the project. Suppose the company expects to sell the new machinery for $2.5 million in scraps at the end of the three years. If the company has a marginal tax rate of 39%, what will be the total cash flow (i.e. the terminal cash flow + the third year’s differential cash flow) in the third year?
total cash flow FORMULA
(i.e. the terminal cash flow + the third year’s differential cash flow)
TOTAL CF FORMULA:
A company is looking to invest in new machinery. The cost of the machinery, including shipping and installation costs, is $34.5 million. The initial outlay also includes an investment in net working capital of $4 million. The company has estimated that revenue will increase $38.9 million in each of the next three years if the machinery is purchased. Costs (both variable and fixed) are also expected to increase $10.2 million in each of the next three years. The company uses a standard straight-line depreciation method. In particular, the company will straight-line depreciate the machinery to zero over the three year life of the project. Suppose the company expects to sell the new machinery for $2.5 million in scraps at the end of the three years. If the company has a marginal tax rate of 39%, what will be the total cash flow (i.e. the terminal cash flow + the third year’s differential cash flow) in the third year?
Paul Bunyan is considering the purchase of a blue mechanical ox. Although the ox will result in an increase in operating income of $25,000 per year, it has a purchase price of $100,000, and it would cost an additional $5,000 after tax to ship and prepare the machine for use. In addition, to properly operate this machine, working capital will be increased by $10,000. The mechanical ox has an expected life of ten years, after which it will be scrapped. Further, assume simplified straight-line depreciation, a 40 percent marginal tax rate, and a required rate of return of 13 percent. What is the terminal cash flow in year 10 (i.e. what is the annual after-tax cash flow in year 10, plus any additional cash flow associated with termination of the project)?
terminal cash flow COMPONENTS
(i.e. what is the annual after-tax cash flow in year 10, plus any additional cash flow associated with termination of the project)?
MACRS schedule
- 33% depreciation in the first year
- 45% depreciation in the second year
- 81% depreciation in the third year
- 41% depreciation in the fourth year.
