Question

In: Finance

A 5-year project requires a $300,000 investment in a machine that is expected to worth $50,000...

A 5-year project requires a $300,000 investment in a machine that is expected to worth $50,000 when the project ends. Operating expenses are expected to be $75,000 in the first year and are expected to increase 3% per year over the life of the project. The appropriate discount rate is 8%, the company’s tax rate is 20%, and the CCA rate is 30%. What is the present value of the CCA tax shield? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit any commas and the $ sign in your response. For example, an answer of $1,000.50 should be entered as 1000.50.)

PVCCATS=(IdTcd+k) (1+.5k1+k)− (SndTcd+k) (1(1+k)n)PVCCATS=IdTcd+k 1+.5k1+k- SndTcd+k 1(1+k)

Solutions

Expert Solution

Solution

In CCA method declining balance is used and also in the first year only 50% of CCA Depreciation rate is allowed. In subsequent years full CCA rate can be used

Now Book value at the beginning of year 1 =300000

CCA allowance= 30%/2*300000= 45000

Now tax rate = 20%

Therefore tax shield for first year = 20% of 45000 = 9000 (Tax shield= Depreciation*tax rate)

Present value of tax shield for 1st year = 9000/(1+.08)^1 (Formula PV= Tax shield/(1+r)^n

Where r= rate of discounting , n= year in consideration

=8333.33

Now for second year Beginning book value= Book value 1st year- Depreciation allowance= 300000-45000

=255000

Depreciation allowance= 30% of 255000= 76500

Tax shield= 20% of 76500= 15300

Present value of tax shield=15300/(1.08^2)

=13117.28

Similarly we will get present value of tax shield for subsequent years

Sum of all present values will give present value of tax shield

Present value of tax shield=39034.71

Year Book value Depreciation Depreciation Allowance Present value
1 300000.00 45000.00 9000.00 8333.33
2 255000.00 76500.00 15300.00 13117.28
3 178500.00 53550.00 10710.00 8501.94
4 124950.00 37485.00 7497.00 5510.52
5 87465.00 26239.50 5247.90 3571.63
Total PV 39034.71

Related Solutions

A 5-year project requires a $300,000 investment in a machine that is expected to worth $50,000...
A 5-year project requires a $300,000 investment in a machine that is expected to worth $50,000 when the project ends. Operating expenses are expected to be $75,000 in the first year and are expected to increase 3% per year over the life of the project. The appropriate discount rate is 8%, the company’s tax rate is 20%, and the CCA rate is 30%. What amount would you use for salvage value in your NPV calculation
A 5-year project requires a $300,000 investment in a machine that is expected to worth $50,000...
A 5-year project requires a $300,000 investment in a machine that is expected to worth $50,000 when the project ends. Operating expenses are expected to be $75,000 in the first year and are expected to increase 3% per year over the life of the project. The appropriate discount rate is 8%, the company’s tax rate is 20%, and the CCA rate is 30%. What is the after-tax present value of the annual operating expenses? (Do not round intermediate calculations. Round...
A 5-year project requires a $300,000 investment in a machine that is expected to worth $50,000...
A 5-year project requires a $300,000 investment in a machine that is expected to worth $50,000 when the project ends. Operating expenses are expected to be $75,000 in the first year and are expected to increase 3% per year over the life of the project. The appropriate discount rate is 8%, the company’s tax rate is 20%, and the CCA rate is 30%. What amount would you use for salvage value in your NPV calculation?
You are considering a new project that requires $300,000 investment in a machine, including installation and...
You are considering a new project that requires $300,000 investment in a machine, including installation and shipping cost. The life of the machine is three years, and it depreciates via 3-year MACRS methods (33.33%, 44.45%, 14.81%, and 7.41%). If you operate this project, the annual sales of the firm increases by $250,000 a year, and the annual operating expense increased by $100,000. The firm has a marginal tax rate of 34%. In order to start the project, the firm has...
A project requires an initial investment of $200,000 in a machine and is expected to produce...
A project requires an initial investment of $200,000 in a machine and is expected to produce cost savings of $120,000 each year for two years. The tax rate is 30%. The machine will be depreciated using the MACRS 3-year schedule (first year 33%, second year 45%, third year 15% and fourth year 7%). The machine can be sold for $50,000 after two years. The project’s required return is 11%. (1)   What is the initial cash flow at t=0? (2)   What are the...
9. A project requires a $219,000 investment in equipment. The equipment is expected to worth $128,000...
9. A project requires a $219,000 investment in equipment. The equipment is expected to worth $128,000 when the project ends in 7 years. Operating savings are expected to be $12,000 in the first year and are expected to increase 5% per year for the life of the project. The CCA rate is 30%, the firm's discount rate is 13%, and the company’s tax rate is 22%. What amount would you use for salvage value in your NPV calculation? (Do not...
5. A project requires an investment of $100m in two years. It is expected to yield...
5. A project requires an investment of $100m in two years. It is expected to yield $25m after the third year, $25m after the fourth year; in the fifth year it will yield $7m, which will grow at 1% per year over the next five years. What is the project’s NPV at a cost of capital of 15%?
You are considering a project that needs $50,000 investment to start. This is a 5 year...
You are considering a project that needs $50,000 investment to start. This is a 5 year project and you are expecting that the project generates annual cash flows after taxes of $10,000, $50,000, $90,000, $20,000 and -$30,000 respectively. What is the EAA of this project if the required rate of return is 8%? Round to the penny. Do not include the dollar sign. If there are multiple answers, then type NA.
A project will cut firm’s operating costs by $50,000. The project requires an initial investment of...
A project will cut firm’s operating costs by $50,000. The project requires an initial investment of $30,000 and be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 35 percent. What is the operating cash flow of the project using the tax shield approach? a. $42,800 b. $35,125 c. $40,450 d. $38,930
A firm is considering a project that requires an initial investment of $300,000 in new equipment,...
A firm is considering a project that requires an initial investment of $300,000 in new equipment, which has a five-year life and a CCA rate of 30 percent. An initial investment in raw materials inventory of $50,000 is also required to support the project, which will rise to 15 percent of sales. The project will generate sales revenue of $400,000 in the first year, which will grow at 4 percent per year. Variable costs will be $220,000 for the first...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT