Finance Answers

How can inflation be viewed as a form of taxation ?

Florida Car Wash is considering a new project whose data are shown below. The equipment to be used has a 3-year tax life, would be depreciated on a straight-line basis over the project’s 3-year life, and would have a zero salvage value after Year 3. No new working capital would be required. Revenues and other operating costs will be constant over the project’s life, and this is just one of the firm’s many projects, so any losses on it can be used to offset profits in other units. If the number of cars washed declined by 40% from the expected level, by how much would the project’s NPV decline? (Hint: Note that cash flows are constant at the Year 1 level, whatever that level is.)

Which of the following statements is CORRECT?
a. If an asset is sold for less than its book value at the end of a project’s life, it will generate a loss for the firm, hence its terminal cash flow will be negative.
b. Only incremental cash flows are relevant in project analysis, the proper incremental cash flows are the reported accounting profits, and thus reported accounting income should be used as the basis for investor and managerial decisions.
c. It is unrealistic to believe that any increases in net working capital required at the start of an expansion project can be recovered at the project’s completion. Working capital like inventory is almost always used up in operations. Thus, cash flows associated with working capital should be included only at the start of a project’s life.
d. If equipment is expected to be sold for more than its book value at the end of a project’s life, this will result in a profit. In this case, despite taxes on the profit, the end-of-project cash flow will be greater than if the asset had been sold at book value, other things held constant.
e. Changes in net working capital refer to changes in current assets and current liabilities, not to changes in long-term assets and liabilities. Therefore, changes in net working capital should not be considered in a capital budgeting analysis.

The Golf Range is considering adding an additional driving range to its facility. The range would cost $76,000, would be depreciated on a straight line basis over its 7-year life, and would have a zero salvage value. The anticipated income from the project is $34,000 a year with $14,400 of that amount being variable cost. The fixed cost would be $16,200. The firm believes that it will earn an additional $13,000 a year from its current operations should the driving range be added. The project will require $2,000 of net working capital, which is recoverable at the end of the project. What is the internal rate of return on this project at a tax rate of 34 percent?
7.53 percent
9.29 percent
11.47 percent
12.68 percent
14.04 percent

Miller's, Inc. is considering a new 4-year expansion project that requires an initial fixed asset investment of $3.6 million. The fixed asset will be depreciated straight-line to zero over its 4-year life, after which time it will be worthless. The project is estimated to generate $3.9 million in annual sales, with costs of $2.6 million. If the tax rate is 34 percent, what is the OCF for this project?
$1,164,000
$997,720
$684,280
$858,000
$911,760

A project has an initial requirement of $261,000 for fixed assets and $27,000 for net working capital. The fixed assets will be depreciated to a zero book value over the 4-year life of the project and have an estimated salvage value of $78,000. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $96,200 and the discount rate is 13 percent. What is the project's net present value if the tax rate is 35 percent?
$42,011
$43,333
$45,799
$47,880
$47,919

The Deltona Instrument Company has 9 percent coupon bonds on the market with 6 years left to maturity. The bonds make annual payments. If the bond currently sells for $974.60, what is its YTM?
8.82 percent
8.90 percent
8.98 percent
9.58 percent
9.63 percent

Outdoor Sports is considering adding a miniature golf course to its facility. The course would cost $138,000, would be depreciated on a straight line basis over its 5-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $72,000 a year with $24,000 of that amount being variable cost. The fixed cost would be $11,600. In addition, the firm anticipates an additional $14,000 in revenue from its existing facilities if the golf course is added. The project will require $3,000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 12 percent and a tax rate of 34 percent?
$11,309
$11,628
$12,737
$14,439
$14,901

ndustrial Services is analyzing a proposed investment that would initially require $538, 000 of new equipment. This equipment would be depreciated on a straight-line basis to a zero balance over the 4-year life of the project. The estimated salvage value is $187,000. The project requires $39,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $194,900 a year. What is the internal rate of return on this project if the relevant tax rate is 34 percent?
15.54 percent
15.92 percent
18.01 percent
18.67 percent
20.49 percent

Consider an asset that costs $459,000 and is depreciated straight-line to zero over its 6-year tax life. The asset is to be used in a 4-year project; at the end of the project, the asset can be sold for $120,000. If the relevant tax rate is 34 percent, what is the aftertax cash flow from the sale of this asset?
$131,220
$127,840
$116,500
$97,600
$79,200