Question

Chevron Philipps has put into place new laboratory equipment for the production of chemicals; the cost is $1,800,000 installed. CP borrows 45% of all capital needed and the borrowing rate is 12.5%. In the first year, 25% of the principal borrowed will be paid back. The throughput rate for in-process test samples has increased the capacity of the lab, saving a net of $X per year. In this first year, depreciation is $360,000 and taxable income is $328,000.

Show equation for Year 1 and 0 and fill in table please. Thanks

a. What is the “gross income” or annual savings of $X? Show your calculations to get credit.

b. Determine the income tax for the first year assuming a marginal tax rate of 40%. Show your calculations to get credit.

c. What is the after-tax cash-flow for the first year? Show your calculations to get credit.

Answer 1