Suppose that Sudbury Mechanical Drifters is proposing to invest $20.0 million in a new factory. It can depreciate this investmentstraight-line over 10 years. The tax rate is 40%, and the discount rate is 10%.a. What is the present value of Sudbury's depreciation tax shields?b. What would be the present value of the tax shield if the government allowed Sudbury to write-off the factory immediately?Complete this question by entering your answers in the tabs below.Required ARequired BWhat is the present value of Sudbury's depreciation tax shields?Note: Enter your answers in millions rounded to 1 decimal place.Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9 Year 10TotalDepreciation straight-line, 10-yearTax Shields at 40% tax ratePV (Tax Shields) at 10%< Required ARequired B>

Answered: Suppose that Sudbury Mechanical…

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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Genesis Corporation want to purchase a piece of machinery for $150,000 that will cost $20,000 to have it delivered and installed. Based on past information, they believe they can sell the machinery for $25,000 in 5 years. The company’s marginal tax rate is 34%. If the applicable CCA rate is 20% and the required return on this project is 15%, what is the present value of the CCA tax shield?
Suppose that Sudbury Mechanical Drifters is proposing to invest $10.8 million in a new factory. It can depreciate this investment straight-line over 10 years. The tax rate is 35%, and the discount rate is 10%. a. What is the present value of Sudbury's depreciation tax shields? (Enter your answers in millions rounded to 1 decimal place.) Total Year 10 Year 9 Year 8 Year 7 Year 6 Year 5 Year 4 Year 3 Year 2 Year 1 Straight-line Schedule $ 10.8 $ 1.1 $ 1.1 $ 1.1 $ 1.1 $ 1.1 $ 1.1 $ 1.1 $ $ 1.1 Straight-line, 10-year $ 1.1 1.1 $ 0.4 $ 0.4 $ 0.4 0.4 $ $ 0.4 0.4 $ 0.4 $ $ $ 0.4 $ 0.4 0.4 Tax Shields at 35% Tc PV (Tax Shields) at 10% b. Suppose that the government allows companies to use double-declining-balance depreciation with the option to switch at any point to straight-line. Now what is the present value of the depreciation tax shields? (Enter your answers in millions rounded to 1 decimal place.) Total Year 10 Year 9 Year 8 Year 7 Year 6 Year 5 Year 4 Year 3 Year 2 Year 1 Double decline…
what is the present value of the tax shield for the following project? the initial investment is $300,000. the project will last for 6 years, at which time the asset will be sold for $90,000. the asset will be depreciated on a declining balance basis at a rate of 20 percent. the firm's marginal tax rate is 40 percent. the firm's required rate of return is 8 percent a) 16,204.36 b) 82,539.68 c) 98,744.04 d) 66,335.32
You are evaluating a project that will require an investment of $18 million that will be depreciated over a period of 18 years. You are concerned that the corporate tax rate will increase during the life of the project. a. Would this increase the accounting break-even point? b. Would it increase the NPV break-even point? a. Would this increase the accounting break-even point? b. Would it increase the NPV break-even point?
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
You are contemplating the replacement of an old printing machine with a new model costing $63,000. The old machine, which originally cost $40,000, has 6 years of expected life remaining and the current book value of $14,000 versus the current market value of $21,000. The firm's corporate tax rate is 24 percent. If the company sells the old machine at the market value, what is the initial after-tax cash outlay for the new printing machine purchase?
Consider the following case of Happy Turtle Transportation Company: Suppose Happy Turtle Transportation Company is considering a project that will require $400,000 in assets. • The company is small, so it is exempt from the interest deduction limitation under the new tax law. • The project is expected to produce earnings before interest and taxes (EBIT) of $40,000. Common equity outstanding will be 20,000 shares. • The company incurs a tax rate of 25%. If the project is financed using 100 % equity capital, then Happy Turtle Transportation Company's return on equity (ROE) on the project will be In addition, Happy Turtle's earnings per share (EPS) will be Alternatively, Happy Turtle Transportation Company's CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the company's debt will be 12%. Because the company will finance only 50% of the project with equity, it will have only 10,000 shares outstanding. Happy Turtle Transportation…
b. Cendrawasih Inc. is considering replacing the equipment it uses to produce crayons. The equipment would cost RM1.37 million, have a 12-year life, and lower manufacturing costs by an estimated RM304,000 a year. The equipment will be depreciated using straight-line depreciation to a book value of zero. The required rate of return is 15 percent and the tax rate is 35 percent. Determine the net income from this proposed project.
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your company is considering a new project that will require $250,000 of new equipment at the start of the project. The equipment will have a depreciable life of eight years and will be depreciated to a book value of $10,000 using straight-line depreciation. The cost of capital is 12 percent, and the firm's tax rate is 21 percent. Estimate the present value of the tax benefits from depreciation. Multiple Choice ___ $117,733 ___ $86,997 ___ $31,296 ___ $63,618
Firm X is considering the replacement of an old machine with one that has a purchase price of $70,000. The current market value of the old machine is $22,000 but the book value is $ 37,000. The firm's combined tax rate is 27%. What is the net cash outflow for the new machine after considering the sale of the old machine? Disregard the effect of depreciation of the new machine if acquired.
Your firm is considering a project that would require purchasing $7.5 million worth of new equipment. Determine the present value of the depreciation tax shield associated with this equipment if the firm's tax rate is 40%, the appropriate cost of capital is 8%, and the equipment can be depreciated Straight- line over a five-year period, with the first deduction starting in one year. Please express the answer in the unit of million and up to 2 places of decimal.

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