Question

# A. Consider an asset that costs \$264,000 and is depreciated straight-line to zero over its 12-year...

A.

 Consider an asset that costs \$264,000 and is depreciated straight-line to zero over its 12-year tax life. The asset is to be used in a 5-year project; at the end of the project, the asset can be sold for \$33,000.

 Required : If the relevant tax rate is 32 percent, what is the aftertax cash flow from the sale of this asset? (Do not round your intermediate calculations.)

rev: 09_18_2012

\$634,932.00

\$71,720.00

\$68,134.00

\$75,306.00

\$22,440.00

B.

 Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of \$4.050 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will be worthless. The project is estimated to generate \$3,600,000 in annual sales, with costs of \$1,440,000.

 Required: If the tax rate is 35 percent, what is the OCF for this project?

rev: 09_18_2012

\$1,782,675

\$1,876,500

\$2,160,000

\$1,970,325

\$526,500

a.

Annual depreciation=(Cost-Salvage value)/Useful Life

=(264000/12)=\$22000/year

Hence book value as on date of sale=Cost-Accumulated Depreciation

=\$264000-(22000*5)=\$154000.

Hence loss on sale=(154000-33000)=\$121000

Hence after tax cash flow=Sale proceeds+(loss on sale*Tax rate)

=33000+(121000*0.32)

=71720.

b.

Annual depreciation=\$4.05million/3

=\$1,350,000

Hence OCF=(Sales-Costs)(1-tax rate)+Tax savings on annual depreciation

=(3,600,000-1,440,000)(1-0.35)+(0.35*1,350,000)

=\$1,876,500