Question

1. When workers connected with the automobile industry go on strike, it typically makes big headlines since the automaker will usually end up being shut down if the strike drags on. Suppose the makers of brakes for GM go out on strike and GM has no other source from which to purchase brakes for its new automobiles. Explain how following a restrictive current asset management policy would affect GM in this case. What are the pros and cons of GM moving to a more flexible policy?

18.

Benson Industries is adding a new assembly line which will increase annual sales by $980,000 and cash expenses by $535,001. The project will require an initial investment in equipment of $1.2 million. This equipment belongs in a 40% CCA class. The company has a marginal tax rate of 35%. What is the operating cash flow in the first year of the project using the tax shield approach?

Multiple Choice

• $205,250

• $289,250

• $373,250

• $347,500

• $314,500

Answer 1

Option C is correct

Step 1 - Calculation on Depreciation for the first year

In the first year we charge half rate of whatever CAA class asset belong

since the asset belongs to 40% CAA Class

Deprecation for the 1st year = 20%

Deprecitaion expense = 1,200,000 * 0.20 = 240,000

Step -2 Calculation of operating cash flow for the first year

Particulars	Amount
Increase in annual sales	980,000.00
Less : cash expenses	535,001.00
Less : Depreciation	240,000.00
Profit Before Tax	204,999.00
Less Tax @35%	71,749.65
Profit After Tax	133,249.35
Add Depreciation	240,000.00
Operating Cash flow	373,249.35

Therefore operating cash flow for the year 1 = 373250

Option C is correct