Investments (Depreciation)
Land $500 ($0)
Bldg. $2,000 ($200 ($2,000/10yr))
Equip. $3,000 ($600 ($3,000/5yr))
At Yr5...
1) Before tax income from operation is $900 (rev $1,200 - exp $300)
So after-tax, including the tax shield, will be ($900 - $800) x (1- tax 40%) + $800 =
$8602) cash flows from sales:
Land: sales $800 - tax base $500 = $300 profits.
tax on profit = $300 x 40% = $120
after-tax cash flow = sales $800 - tax $120 =
$680 Bldg: sales $500 - tax base $1,000 = $500 loss.
tax benefit on loss = $500 x 40% = $200
after-tax cash flow = sales $500 + $200 =
$700 Equip: sales $250 - tax base $0 = $250 profit
tax on profit = $250 x 40% = $100
after-tax cash flow = sales $250 - $100 =
$150
3) Total net cashflow in Yr5; $860 + $680 + $700 + $150 =
$2,390(I know study materials use different calculation methods/orders, but for me the above is better as I can breakdown into activities to avoid any miscalculations)
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Eisuke
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Original Message:
Sent: 12-11-2010 11:16 PM
From: Sarika Anand
Subject: Part 3 Q .... Help me plz....
194) Olson Industries needs to add a small plant to accommodate a special contract to supply building materials over a five year period. The required initial cash outlays at Time 0 are as follows.
Land $500,000
New building 2,000,000
Equipment 3,000,000
Olson uses straight-line depreciation for tax purposes and will depreciate the building over 10 years and the equipment over 5 years. Olson’s effective tax rate is 40%.
Revenues from the special contract are estimated at $1.2 million annually and cash expenses are estimated at $300,000 annually. At the end of the fifth year, the assumed sales values of the land and building are $800,000 and $500,000, respectively. It is further assumed the equipment will be removed at a cost of $50,000 and sold for $300,000.
As Olson utilizes the net present value (NPV) method to analyze investments, the net cash flow for period 5 would be`
a. $1,710,000.
b. $2,070,000.
c. $2,230,000.
d. $2,390,000.