Practise Question Chap 11
Practise Question Chap 11
Practise Question Chap 11
Allen Air Lines must liquidate some equipment that is being replaced.
The equipment
originally cost $12 million, of which 75% has been depreciated. The used
equipment can
be sold today for $4 million, and its tax rate is 40%. What is the
equipment’s after-tax net
salvage value?
Equuipment Cost
Less: Accumalated Deprication (75%)
Book Value
Salvage Value
Gain on disposal (S.V-B.V)
Tax in gain @ 40%
Q:11-4
A)
BASE PRICE
Add: Install
Cost of M/c
B)
Operating Cost
Tax Saving in operating cost (1-0.35)
Depriciable Cost
Depriciable rate
Depriciation
After Tax Saving in depriciation (0.35)
C)
Salvage Value
A.S, S.v>B.V
Gain on disposal
D)
Q: 12-7
The president of the company you work for has asked you to evaluate
the proposed
acquisition of a new chromatograph for the firm’s R&D department. The
equipment’s
basic price is $70,000, and it would cost another $15,000 to modify it for
special use by
your firm. The chromatograph, which falls into the MACRS 3-year class,
would be sold
after 3 years for $30,000. The MACRS rates for the first three years are
0.3333, 0.4445, and
0.1481. Use of the equipment would require an increase in net working
capital (spare
parts inventory) of $4,000. The machine would have no effect on
revenues, but it is
expected to save the firm $25,000 per year in before-tax operating
costs, mainly labor. The
firm’s marginal federal-plus-state tax rate is 40%.
A)
Base Price
Add: Another Cost
Cost of M/C
B)
Depriciation Cost
Depriciable Rate
Deprication
C)
A.S, B.V>S.V
So there is loss on disposal
Loss On Disposal
D)
Q:11-8
Q: 12-9
The Gilbert Instrument Corporation is considering replacing the wood
steamer it
currently uses to shape guitar sides. The steamer has 6 years of
remaining life. If kept,
the steamer will have depreciation expenses of $650 for five years and
$325 for the sixth
year. Its current book value is $3,575, and it can be sold on an Internet
auction site for
$4,150 at this time. If the old steamer is not replaced, it can be sold for
$800 at the end
of its useful life.Gilbert is considering purchasing the Side Steamer 3000,
a higher-end steamer, which
costs $12,000 and has an estimated useful life of 6 years with an
estimated salvage value of
$1,500. This steamer falls into the MACRS 5-year class, so the applicable
depreciation
rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new
steamer is faster
and allows for an output expansion, so sales would rise by $2,000 per
year; the new
machine’s much greater efficiency would reduce operating expenses by
$1,900 per year.
To support the greater sales, the new machine would require that
inventories increase by
$2,900, but accounts payable would simultaneously increase by $700.
Gilbert’s marginal
federal-plus-state tax rate is 40%, and its WACC is 15%. Should it replace
the old steamer?
4,000,000
1,000,000
400000
600,000
4,000,000
400,000
4,600,000
NPV 6746.77501
1,080,000
22,500
1,102,500
15,500
1,118,000
(1-0.9259) 1,102,500
81,695
605,000
523,305
183156.75
421,843
15,500
437,343
70,000
15,000
85,000
4,000
89,000
6298.5
30000
36298.5
14519.4
25,000
39,519
Machine Depriciation as per Tax Rate 2400 3840 2304 1382.4 691.2
Compute NPV:
Years 0 1 2 3 4
Net Investment -5,340
After Tax Sale reveneue increase @40% 2,340 2,340 2,340 2,340
Depriciation Tax Saving @ 40% 700 1276 661.6 292.96
Working Capital Recovery
After Tax salvaeg of new machine (1,500*1-0.40)
Opportunity Cost of Old Machine (800*1-0.40)
2,340
146.48
2,200
900
-480
691.2
1.925415
1330.847
5 6 7 8
12614.4 6307.2 0 0
40814.4 34507.2 28200 28200