Suppose an asset has a purchase cost of $15,000, a life of five years, a salvage value of $3,000 at the end of five years, and a net annual before-tax revenue of $7,500. The firm's marginal tax rate is 35%. The asset will be depreciated by five-year MACRS.(a) Determine the cash flow after taxes, assuming that the purchase cost will be entirely financed by the equity funds.(b) Rework part (a), assuming that the entire investment would be financed by a bank loan at an interest rate of 9%.(c) Given a choice between paying the purchase cost up front from the firm's equity and using the financing method of part (b), show calculations to justify which is the better choice at an interest rate of 9%.

Suppose an asset has a purchase cost of $15,000, a life of five years, a salvage value of $3,000 at the end of five years, and a net annual before-tax revenue of $7,500. The firm's marginal tax rate is 35%. The asset will be depreciated by five-year MACRS.(a) Determine the cash flow after taxes, assuming that the purchase cost will be entirely financed by the equity funds.(b) Rework part (a), assuming that the entire investment would be financed by a bank loan at an interest rate of 9%.(c) Given a choice between paying the purchase cost up front from the firm's equity and using the financing method of part (b), show calculations to justify which is the better choice at an interest rate of 9%.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 5PB: Mason, Inc., is considering the purchase of a patent that has a cost of $85000 and an estimated...

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Mason, Inc., is considering the purchase of a patent that has a cost of $85000 and an estimated revenue producing lite of 4 years. Mason has a required rate of return that is 12% and a cost of capital of 11%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Suppose an asset has a first cost of $8,000,a life of five years, a salvage value of $2,000 atthe end of five years, and a net annual before-taxrevenue of $2,500. The firm’s marginal tax rate is35%. The asset will be depreciated by three-yearMACRS.(a) Using the generalized cash flow approach, determine the cash flow after taxes.(b) Rework part (a), assuming that the entire investment would be financed by a bank loan at aninterest rate of 9%.(c) Given a choice between the financing methodsof parts (a) and (b), show calculations to justifyyour choice of which is the better one at an interest rate of 9%.
Consider the following after-tax cash flows: (a) Compute the project balances for Projects A and D, as a function of project year, at i = 10%.(b) Compute the future worth values for Projects A and D at i = 10% at theend of service life.(c) Suppose that Projects Band Care mutually exclusive. Assume also that the required service period is eight years and that the company is considering leasing comparable equipment that has an annual lease expense of $3,000 for the remaining years of the required service period. Which project is the better choice?
Company is considering buying an asset for $180,000. It is expected to produce the following net cash flows. Compute the payback period for this investment.
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