3.8 Bright Horizons Skilled Nursing Facility, an investor-owned company, constructed a new building to replace its outdated facility. The new building was completed on January 1, 2015, and Bright Horizons began recording depreciation immediately. The total cost of the new facility was $18,000,000, comprising (a) $10 million in construction costs and (b) $8 million for the land. Bright Horizons estimated that the new facility would have a useful life of 20 years. The salvage value of the building at the end of its useful life was estimated to be $1,500,000. a. Using the straight-line method of depreciation, calculate annual depreciation expense on the new facility b.Assuming a 40 percent income tax rate, how much did Bright Horizons save in income taxes for the year ended December 31, 2015, as a result of the depreciation recorded on the new facility (i.e., what was the depreciation shield)? c.Does the depreciation shield result in cash or noncash savings for Bright Horizons? Explain.

3.8 Bright Horizons Skilled Nursing Facility, an investor-owned company, constructed a new building to replace its outdated facility. The new building was completed on January 1, 2015, and Bright Horizons began recording depreciation immediately. The total cost of the new facility was $18,000,000, comprising (a) $10 million in construction costs and (b) $8 million for the land. Bright Horizons estimated that the new facility would have a useful life of 20 years. The salvage value of the building at the end of its useful life was estimated to be $1,500,000.

Using the straight-line method of depreciation, calculate annual depreciation expense on the new facility

Assuming a 40 percent income tax rate, how much did Bright Horizons save in income taxes for the year ended December 31, 2015, as a result of the depreciation recorded on the new facility (i.e., what was the depreciation shield)?

Does the depreciation shield result in cash or noncash savings for Bright Horizons? Explain.

The mean time it takes aspirin to relieve headache pain is known to be 30 minutes. A drug company has developed a new drug that they claim provides relief in less time. Government scientists tested the new drug on a sample of 25 individuals with headaches. For this sample, the mean time to relief was 26 minutes. The population standard deviation for the new drug is known to be 7 minutes. A level of significance of .01 is to be used to test if the new drug relieves pain faster than aspirin.

1. State the null and alternative hypotheses for the test of the new drug.

2. Determine the critical value (cut-off point) for the test.

3. a. Draw a diagram of the sampling distribution used to perform the test. b. Label the horizontal axis of your diagram. c. Locate the critical value on your diagram.

4. Calculate the test statistic for this hypothesis test.

5. To what is the test statistic compared to decide on the effectiveness of the new drug?

You are the chief marketing officer for a large international organization that provides service to over 25,000 retail outlets. Management wants to improve sales by increasing business with existing customers and getting new customers as well. You feel that the best way to do this is to start by providing your field staff with new laptops and software. presentation that you will give to the Board of Directors of your Corporation to justify spending approximately $100,000 on this program. Your presentation should cover at least the following key points – showing all the new program will either save money or increase revenues: •How will the new communication tools allow the field sales staff to spend more time with existing customers and developing new business? •What types of communication tools can be linked together to improve overall efficiencies and the field sales staff’s access to information? •How can this new program feed valuable information into the master database of the organization.

The J. J. Hill Company is considering new digging equipment machine. The existing digging equipment cost $1,000,000 five years ago and is being depreciated using MACRS, when classified as a 5-year asset. Hill's management estimates the old equipment can be sold for $200,000. The new equipment costs $1,200,000 and would be depreciated over five years using MACRS. At the end of the fifth year, Hill's management intends to sell the new equipment for $400,000. The new equipment is more efficient and would reduce expense by $200,000 per year for the next five years. The marginal tax rate is 35%.

(a) What are the cash flows related to the acquisition of the new equipment?

(b) What are the cash flows related to the disposition of the old equipment?

(c) What are the cash flows related to the disposition of the new equipment?

(d) What are the operating cash flows for each year?

(e) What the net cash flows for each year?

• FIN Ltd is considering the purchase of a new photocopier to replace the existing one. The following information is available.

• The total cost of the NEW is $16,000. The NEW is to be depreciated using the straight-line method with an effective life of 10 years.

• The OLD was purchased 5 years ago for $7500. When it was purchased, the asset had an expected useful life of 15 years and an estimated market value of zero at the end of its life. The machine currently has a market value of $1000.

• As a result of the NEW , sales in each of the next ten years are expected to increase by $2000, and product costs (excluding depreciation) will represent 50% of sales.

• As a result of the NEW, current assets will increase by $5,000 and current liabilities will increase by $2000. The net working capital will be recovered in the terminal year.

• The terminal value of the NEW at the end of Year 10 will be $3000.
• The company is subject to a 30% tax rate and the cost of capital is 15%.

i) Compute the NPV. Should FIN accept the project and why?

A firm is considering an investment in a new machine with a price of $18.15 million to replace its existing machine. The current machine has a book value of $6.15 million and a market value of $4.65 million. The new machine is expected to have a four-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $6.85 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $265,000 in net working capital. The required return on the investment is 12 percent and the tax rate is 35 percent.

What is the NPV of the decision to purchase a new machine?

What is the IRR of the decision to purchase a new machine?

What is the NPV of the decision to purchase the old machine?

What is the IRR of the decision to purchase the old machine?