BUAD 306 Fall 2015 Professor Kenneth Ahern Practice Problems 5 Answers posted Wednesday October 21 1 An asset used in a four year project falls in the seven year MACRS class for tax purposes The asset has an acquisition cost of 9 000 000 and will be sold for 4 000 000 at the end of the project If the tax rate is 35 percent what is the aftertax salvage value of the asset Year 1 2 3 4 5 6 7 8 MACRS DEPRECIATION ALLOWANCES Three Year Five Year Seven Year 33 33 20 00 14 29 44 45 32 00 24 49 14 81 19 20 17 49 7 41 11 52 12 49 11 52 8 93 5 76 8 92 8 93 4 46 2 In the context of capital budgeting describe what an opportunity cost is and give an example 3 Johnson Controls Inc is considering a new three year expansion project that requires an initial fixed asset investment of 2 7 million The fixed asset will be depreciated straight line to zero over its three year tax life after which time it will be worthless The project is estimated to generate 2 080 000 in annual sales with costs of 775 000 If the tax rate is 35 percent what is the OCF for this project 4 Suppose the required return on the project in question 3 is 12 percent What is the project s NPV 5 XYZ Corp is considering a four year project to improve its production efficiency Buying a new machine press for 470 000 is estimated to result in 190 000 in annual pretax cost savings The press falls in the MACRS five year class and it will have a salvage value at the end of the project of 80 000 The press requires an initial investment in spare parts inventory of 20 000 along with an additional 2 500 in inventory for each succeeding year of the project If the tax rate is 35 and its discount rate is 9 should the company buy and install the machine press 6 You are considering whether compact fluorescent lamps CFLs are better than incandescent lightbulbs Suppose a typical 60 watt incandescent lightbulb costs 0 45 and lasts for 1 000 hours A 15 watt CFL which provides the same light costs 3 40 and lasts for 12 000 hours A kilowatt hour of electricity costs 0 121 A kilowatt hour is 1 000 watts for 1 hour If you require a 10 percent return and use a light fixture 500 hours per year what is the equivalent annual cost of each lightbulb Which one is a better value
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