Question

5) Your Company is considering a new project that will require $960,000 of new equipment at the start of the project. The equipment will have a depreciable life of 8 years and will be depreciated to a book value of $372,000 using straight-line depreciation. The cost of capital is 11%, and the firm's tax rate is 34%. Estimate the present value of the tax benefits from depreciation (closest to).

A) $48,510
B) $24,990
C) $128,602
D) $73,500

6) Your firm needs a machine which costs $200,000, and requires $35,000 in maintenance for each year of its 5 year life. After 3 years, this machine will be replaced. The machine falls into the MACRS 5-year class life category. Assume a tax rate of 30% and a discount rate of 14%. If this machine can be sold for $20,000 at the end of year 5, what is the after tax salvage value?

A) $14,000.00
B) $17,456.00
C) $8,064
D) $8,480.00

14) Scribble, Inc. has sales of $91,000 and cost of goods sold of $75,000. The firm had a beginning inventory of $21,000 and an ending inventory of $23,000. What is the length of the days' sales in inventory? (Round your answer to 2 decimal places.)

A) 84.23 days
B) 102.20 days
C) 111.93 days
D) 92.25 days

Answer 1

5]

Annual depreciation = (initial cost - ending book value) / depreciable life

Annual depreciation = (960,000 - $372,000) / 8 = $73,500

annual depreciation tax shield = Annual depreciation * tax rate = $73,500 * 34% = $24,990

present value of depreciation tax shield is calculated using PV function in Excel :

rate = 11%

nper = 8

pmt = 24990

PV is calculated to be $128,602

6]

The yearly depreciation is calculated as below ;

total depreciation upto end of year 5 = $188,480

book value at end of year 5 = initial cost - total depreciation = $200,000 - $188,480 = $11,520

salvage value = $20,000

tax on salvage value = (salvage value - book value) * tax rate = ($20,000 - $11,520) * 30% = $2544

after tax salvage value = salvage value - tax = $20,000 - $2,544 = $17,456

14]

days sales in inventory = 365 * ending inventory / COGS

days sales in inventory = 365 * 23,000 / 75,000 = 111.93 days