12. Meane Company is trying to plan ahead for upcoming income tax changes expected after the 2024 election. Meane is considering acquiring an asset in January 2025 for a cost of $600,000 that will last for eight years and have a residual value of $80,000 at that time. The asset is expected to bring in net cash benefits of $300,000 a year before income taxes over the life of the project. Meane's accountant is trying to chose the best depreciation method, i.e., the one that contributes to the maximum Net Present Value of the project, given the expected applicable income tax rates: Year Tax Rates 2025 25% 2026 30% 2027 35% 2028 2029 2030 2031* 40% 40% 45% 45% * Rates are expected to remain at 45% after 2031. For income tax purposes, the company will depreciate the asset over a five-year period to a zero salvage value using the Straight-line method or as a five-year MACRS asset (See Problem 11). Required: a. Using the company's 14% required rate of return, determine which method leads to the greater NPV and the amount by which if exceeds the other alternative. b. Is there a required rate of return where the two methods would provide identical NPV's? If so, what is it?

12. Meane Company is trying to plan ahead for upcoming income tax changes expected after the 2024 election. Meane is considering acquiring an asset in January 2025 for a cost of $600,000 that will last for eight years and have a residual value of $80,000 at that time. The asset is expected to bring in net cash benefits of $300,000 a year before income taxes over the life of the project. Meane's accountant is trying to chose the best depreciation method, i.e., the one that contributes to the maximum Net Present Value of the project, given the expected applicable income tax rates: Year Tax Rates 2025 25% 2026 30% 2027 35% 2028 2029 2030 2031* 40% 40% 45% 45% * Rates are expected to remain at 45% after 2031. For income tax purposes, the company will depreciate the asset over a five-year period to a zero salvage value using the Straight-line method or as a five-year MACRS asset (See Problem 11). Required: a. Using the company's 14% required rate of return, determine which method leads to the greater NPV and the amount by which if exceeds the other alternative. b. Is there a required rate of return where the two methods would provide identical NPV's? If so, what is it?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Your new employer, Freeman Software, is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33.33%, 44.45%, 14.81%, and 7.41% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project's 10-year expected life. What is the Year 1 cash flow? Equipment cost (depreciable basis) $65,000 Sales revenues, each year $60,000 Operating costs (excl. deprec.) $25,000 Tax rate 25.0% a. $36,869 b. $31,849 c. $35,114 d. $31,666 e. $33,442
JPGR Inc is considering a project with a $2,000,000 initial investment, that is expected to create incremental after-tax cash flows of $450,000 per year for 7 years, starting 1 year from today. Given this information, what is the IRR of the project, stated as an APR compounded annually? A) 12.84% B) 13.57% C) 14.38% D) 15.43%
Muscat Metal is evaluating a project that requires an investment of $150 million today and provides a single cash flow of $180 million for sure one year from now. Muscat Metal decides to use 100% debt financing for this investment. The risk-free rate is 5% and Muscat's corporate tax rate is 21%. Assume that the investment is fully depreciated at the end of the year. The NPV of this project using the APV method is closest to: a. $71 million. b. $10 million c. $17 million. d. $42 million
Let's say you have the opportunity to invest in a project that will require you to invest $209,964.39 today. You will receive positive after tax cash flows of $50,000 at the end of each of the next five years. At the end of that fifth year, you will also receive a terminal value payment of $35,000 after tax. Your cost of capital is 7.0%. What is the NPV of the project? Round to the nearest $ and use the $ symbol..and use a comma in your number if applicable.
Let's say you have the opportunity to invest in a project that will require you to invest $133,292.00 today. You will receive positive after tax cash flows of $37,000 at the end of each of the next six years. At the end of that sixth year, you will also receive a terminal value payment of $22,000 after tax. Your cost of capital is 11.0%. What is the NPV of the project? Round to the nearest $ and use the $ symbol..and use a comma in your number if applicable. No decimals.
(Ignore income taxes in this problem.) Your Corporation is considering a project that would require an investment of $203,000 and would last for 6 years. The annual net operating income from the project would be $103,000, which includes depreciation of $30,000. The scrap value of the project's assets at the end of the project would be $18,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to: O 1.53 years O 2.78 years O 1.97 years O 1.67 years
The Drow ranger Company is considering a new product line to supplement its range line. It is anticipated that the new product line will involve cash investment of P700,000 at time 0 and P1,000,000 in year 1. After- tax cash inflows of P250,000 are expected in year 2, P300,000 in year 3, P350,000 in year 4 and P400,000 each year thereafter through year 10. Though the product line might be viable after year 10, the company prefers to be conservative and end all calculations at that time. a.) If the required rate of return is 15%, what is the net present value of the project? b.) What is the internal rate of return? c.) What is the project's payback period?
Ace Investment Company is considering the purchase of the Apartment Arms project. Next year's NOI and cash flow is expected to be $2,080,000, and based on Ace's economic forecast, market supply and demand and vacancy levels appear to be in balance. As a result, NOI should increase at 4 percent each year for the foreseeable future. Ace believes that it should earn at least a 13 percent return on its investment. Required: a. Assuming the above facts, what would the estimated value for the property be now? b. What going-in cap rates should be indicated from recently sold properties that are comparable to Apartment Arms? c. What would the estimated value for the property, if the required return changes to 12 percent?
Monroe Printing is evaluating the pamphlet project. The project would require an initial investment of $73,300.00 that would be depreciated to $12,300.00 over 4 years using straight-line depreciation. The first annual operating cash flow of $18,000.00 is expected in 1 year, and annual operating cash flows of $18,000.00 are expected each year forever. Monroe Printing expects the project to have an after-tax terminal value of $108,700.00 in 3 years. The tax rate is 22.80%. What is X, the project's relevant expected cash flow for NPV analysis in year 3? $83,916.40 (plus or minus $10) $108,700.00 (plus or minus $10) $101,916.40 (plus or minus $10) $126,700.00 (plus or minus $10) None of the above is within $10 of the correct answer
Management expects a project to generate EBIT of $600,000 per year for 4 years.Depreciation expense is expected to be $225,000 per year and the corporation’s tax rateis 40%. The project will require an increase in net working capital of $50,000 in yearone and allow a decrease in net working capital of $25,000 in year four. The capitalexpenditure for the project will occur in year zero. What is the free cash flow for theproject in year one?
Kelly, Inc. management is considering purchasing a new machine at a cost of $4,133,250. They expect this equipment to produce cash flows of $814,322, $863,275, $937,250, $1,017,112, $1,212,960, and $1,225,000 over the next six years. If the appropriate discount rate is 15 percent, compute the NPV of this investment and explain how the tax imposition would affect your NPV.
Ace Investment Company is considering the purchase of the Apartment Arms project. Next year’s NOI and cash flow is expected to be $2,000,000, and based on Ace’s economic forecast, market supply and demand and vacancy levels appear to be in balance. As a result, NOI should increase at 4 percent each year for the foreseeable future. Ace believes that it should earn at leasta 13 percent return on its investment.a. Assuming the above facts, what would the estimated value for the property be now?b. What “going-in” cap rates should be indicated from recently sold properties that are comparable to Apartment Arms?c. Assuming that in part (a) the required return changes to 12 percent, what would the value be now?d. Assume results in part (c). What should the investor now be observing regarding the price of “comparable” sales? What market forces may be accounting for the differences in value between (a) and (c)?

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