Question

37.) Marc Corporation wants to purchase a new machine for $400,000. Management predicts that the machine will produce sales of $281,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $81,000 per year. The company uses MACRS for depreciation. The machine is considered to be a 3-year property and is not expected to have any significant residual value at the end of its useful life. Marc's combined income tax rate, t, is 30%. Management requires a minimum after-tax rate of return of 10% on all investments. A partial MACRS depreciation table is reproduced below.

Year	3-year property	5-year property
1	33.33	20.00
2	44.45	32.00
3	14.81	19.20
4	7.41	11.52
5		11.52
6		5.76

What is the after-tax cash inflow in Year 1 from the proposed investment (rounded to the nearest thousand)?

Multiple Choice

• $72,000.

• $124,000.

• $180,000.

• $250,000.

• $47,000.

38.) Brandon Company is contemplating the purchase of a new piece of equipment for $40,000. Brandon is in the 40% income tax bracket. Predicted annual after-tax cash inflows from this investment are $17,000, $13,000, $8,000, $4,000 and $6,000 for years 1 through 5, respectively. The firm uses straight-line depreciation with no residual value at the end of five years.

Assume that the hurdle rate for accepting new capital investment projects for the company is 4%, after-tax. (Note: PV $1 factors for 4% are as follows: for year 1 = 0.962, for year 2 = 0.925, for year 3 = 0.889, for year 4 = 0.855, for year 5 = 0.822; the PV annuity factor for 4%, 5 years = 4.452.) At an after-tax discount rate of 4%, the estimated PV (present value) payback period, in years (rounded to two decimal places) is:

Multiple Choice

• 2.84 years.

• 3.45 years.

• 3.84 years.

• 4.22 years.

• More than 5 years.

39.) Western Electronics (WE) is reviewing the following data relating to a new equipment proposal:

Net initial investment outlay	$	74,000
After-tax cash inflow from disposal of the asset after 5 years	$	11,000
Present value of an annuity of $1 at 12% for 5 years		3.605
Present value of $1 at 12% in 5 years		0.567

WE expects the net after-tax savings in cash outflows from the investment to be equal in each of the 5 years. What is the minimum amount of after-tax annual savings (including depreciation effects) needed to make the investment yield a 12% return (rounded to the nearest whole dollar)?

Multiple Choice

• $14,689.

• $17,611.

• $18,797.

• $20,389.

• $22,178.

40.) A profitable company pays $95,000 wages and has depreciation expense of $80,000. The company's income tax rate, t, is 40%. The after-tax cash flows from these two items are calculated as follows:

Multiple Choice

• An after-tax cash outflow of $32,000 for wages, and a cash inflow of $57,000 for depreciation expense.

• An after-tax cash outflow of $32,000 for wages, and a cash inflow of $32,000 for depreciation expense.

• An after-tax cash outflow of $57,000 for wages, and a cash inflow of $57,000 for depreciation expense.

• An after-tax cash outflow of $57,000 for wages, and a cash inflow of $32,000 for depreciation expense.

• An after-tax cash outflow of $32,000 for wages, and a cash inflow of $95,000 for depreciation expense.

Answer 1

(37) depreciation is non cash expense it does not result in actual cash outflow. however its is an expense which saves tax.

so the cash inflow is in form of tax on depreciation which is also known as depreciation tax shield.

depreciation = cost *depreciation rate

=$400,000*33.33%

=$133,320

year		cash flow
1	cash inflow(revenue)	$281,000
	Less: cash outflow (expense)	($81,000)
	Less: depreciation	($133,320)
	Net income before tax	$66,680[281000-81000-133320]
	Tax rate	30%
	Income tax	$20,004[66680*30%]
	Net income after tax	$46,676[66680-20004]
	add: non cash expense depreciation	$133,320
	Net cash inflow in year 1	$179,996[46676+133320]

rounding off to nearest thousand it is $180,000

(38) pay back period is the time within which the initial investment is covered back in form of cash inflow.

we will use discounted cash inflow

years	after tax cash flow	PV factor	present value of cash inflow	cumulative cash flow
1	$17000	0.962	$16,354 [17000*.962]	$16,354
2	$13000	0.925	$12,025 [13000*.925]	$28,379
3	$8000	0.889	$7,112 [8000*.889]	$35,491
4	$4000	0.855	$3,420 [4000*.855]	$38,911
5	$6000	0.822	$4,932[6000*.822]	$43,843
		present value	$43,843[16354+12025+7112+3420+4932]

payback period = years before full recovery + [unrecovered investment]/cash flow in next period

=4 + [40000-38911]/4932

=4+0.22

=4.22 years

(39) the cash inflow for five years should equal the initial investement

suppose cash inflow is X

present value of X+ present value of salvage = initial investment

after-tax annual savings * annuity factor + salvage *PV factor 5th year = initial investment

after tax annual savings*3.605+11000*.567 =$74000

3.605X +6237=74000

x=18,797$

(40) depreciation will not result in cash flow but tax savings from depreciation is cash inflow

wages saves tax as it is an expense.so net cash outflow would be wages- tax

=$95,000-40%*95000

=57000$ cash ouflow

depreciation = $80000*40%

=$32,000 cash inflow

answer (c) An after-tax cash outflow of $57,000 for wages, and a cash inflow of $32,000 for depreciation expense.