Question

Consider the case of Newcastle Coal Company:

Newcastle Coal Company is considering a project that requires an investment in new equipment of $4,410,000. Under the new tax law, the equipment is eligible for 100% bonus depreciation at t = 0 so the equipment will be fully depreciated at the time of purchase. Newcastle estimates that its accounts receivable and inventories need to increase by $840,000 to support the new project, some of which is financed by a $336,000 increase in spontaneous liabilities (accounts payable and accruals). The company's tax rate is 25%.

1) The after-tax cost of Newcastle’s new equipment is   

A. $3,307,500

B. $840,000

C.$3,811,500

2) Newcastle’s initial net investment outlay is   .

A. $3,811,500

B. $3,601,500

C. $3,475,500

Suppose Newcastle’s new equipment is expected to sell for $1,200,000 at the end of its four-year useful life, and at the same time, the firm expects to recover all of its net operating working capital (NOWC) investment. Remember, that under the new tax law, this equipment was fully depreciated at t = 0. If the firm’s tax rate is 25%, what is the project’s total termination cash flow?

A. $804,000

B. $900,000

C. $1,404,000

D. $1,200,000

Answer 1

ANSWER 1 : A : 3307500

ANSWER 2 : A : 3811500

ANSWER 3 : C : 1404000