Week 10 Questions

The MacCauley Company has sales of $200 million and total expenses (excluding depreciation) of $130 million. Straight-line depreciation on the company’s assets is $15 million, and the maximum accelerated depreciation allowed by law is $25 mil- lion. Assume that all taxable income is taxed at 40 percent. Assume also that net working capital remains constant. Calculate the MacCauley Company’s after-tax operating cash flow using both straight-line and accelerated depreciation.

b. Assuming that the company uses straight-line depreciation for book purposes and accelerated depreciation for tax purposes, show the income statement reported to the stockholders. What is the after-tax operating cash flow under these circumstances?

5. Anew machine costing $100,000 is expected to save the McKaig Brick Company $15,000 per year for 12 years before depreciation and taxes. The machine will be depreciated on a straight-line basis for a 12-year period to an estimated salvage value of $0. The firm’s marginaltaxrateis40percent.Whataretheannualnet cash flows associated with the purchase of this machine? Also, compute the net investment (NINV) for this project.

6. The Jacob Chemical Company is considering building a new potassium sulfate plant. The following cash outlays are required to complete the plant:

Year   Cash Outlay

$4,000,000  2,000,000  500,000 Jacob’s cost of capital is12percent, and its marginal tax rate is 40 percent. a. Calculate the plant’s net investment (NINV). What is the installed cost of the plant for tax purposes

7. The Taylor Mountain Uranium Company currently has annual cash revenues of $1.2 million and annual cash expenses of $700,000. Depreciation amounts to $200,000 per year. These figures are expected to remain constant for the foreseeable future (at least 15 years). The firm’s marginal tax rate is 40 percent. A new high-speed processing unit costing $1.2 million is being considered as a potential investment designed to increase the firm’s output capacity. This new piece of equipment will have an estimated usable life of 10 years and a $0 estimated salvage value. If the processing unit is bought, Taylor’s annual revenues are expected to increase to $1.6 million and annual expenses (exclusive of depreciation) will increase to $900,000. Annual depreciation will increase to $320,000. Assume that no increase in net working capital will be required as a result of this project. Compute the project’s annualnetcashflowsforthenext10years, assuming that the new processing unit is purchased. Also, compute the net investment (NINV) for this project.

Using the Ashford University Library as a resource, find two articles that discuss financial ratio analysis. Identify two advantages and two disadvantages to using ratios in financial analysis. Be sure to cite your sources using APA format as outlined in the Ashford Writing Center.

What is an opportunity cost rate? How is this rate used in discounted cash flow analysis, and where is it shown on a time line? Is the opportunity rate a single number that is used to evaluate all potential investments?

If a firm’s earning per share grew from $1 to $2 over a 10-year period, the total growth would be 100%, but the annual growth rate would be less than 10%. True or false? Explain.

Would you rather have a saving account that pays 5% interest compounded semiannually or one that pays 5% interest compounded daily? Explain.

Problems 4-3, 4-7, 4-10, 4-29

Your parents retire at 18 years. They currently have $250,000, and they think they will need $1 million at retirement. What annual interest rate must they earn to reach their goal, assuming they don’t save any additional funds?

An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn 8% annually, what is this investment’s present value? Its future value?

Use both the TVM equations and a financial calculator to find the following values. See the Hint for Problem 4-9. (HINT from problem 4-9 – If you are using a financial calculator, you can enter the known values and then press the appropriate key to find the unknown variable. Then, without clearing the TVM register, you can “override†the variable that changes by simply entering a new value for it and then pressing the key for the unknown variable to obtain the second answer.)

a) An initial $500 compounded for 10 years at 6%

b) An initial $500 compounded for 10 years at 12%

c) The present value of $500 due in 10 years at a 6% discount rate

d) The present value of $500 due in 10 years at a 12% discount rate

Assume that your aunt sold her house on December 31, and to help close the sale she took a second mortgage in the amount of 10,000 as part of the payment. The mortgage has a quoted (or normal) interest rate of 10%; it calls for payments every 6 months, beginning on June 30, and is to be amortized over 10 years. Now, 1 year later, your aunt must inform the IRS and the person who brought the house about the interest that was included in the two payments made during the year. (This interest will be income to your aunt and a deduction to the buyer of the house.)

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