Reading 28: Capital Budgeting LOS a~Q10-13 beginning, purchase, machine, method

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Q10. Jayco, Inc. is considering the purchase of a new machine for $60,000 that will reduce manufacturing costs by $5,000 annually.

§       Jayco will use the MACRS accelerated method (5 year asset) to depreciate the machine, and expects to sell the machine at the end of its 6-year operating life for $10,000. (The percentages for the 5-year MACRS class are, beginning with year 1 and ending with year 6, 20%, 32%, 19%, 12%, 11%, and 6%.)

§       The firm expects to be able to reduce net working capital by $15,000 when the machine is installed, but required working capital will return to the original level when the machine is sold after 6 years.

§       Jayco's marginal tax rate is 40%, and it uses a 12% cost of capital to evaluate projects of this nature. Use this data for the next 4 questions.

What is the first year's modified accelerated cost recovery system (MACRS) depreciation?

A)  $12,000.

B) $15,000.

C) $10,000.

 

Q11. What is the initial cash outlay?

A)  $75,000.

B) $15,000.

C) $45,000.

 

Q12. What is the first year's operating cash flow?

A)  $7,800.

B) $4,800.

C) $3,000.

 

Q13. What is the terminal year's cash flow (not counting the last year's operating cash flow)?

A)  $21,000.

B) ($9000).

C) ($4,000).

[此贴子已经被作者于2009-3-3 18:02:57编辑过]

chenyu123

 

 

 

Q10. Jayco, Inc. is considering the purchase of a new machine for $60,000 that will reduce manufacturing costs by $5,000 annually.fficeffice" />

• Jayco will use the MACRS accelerated method (5 year asset) to depreciate the machine, and expects to sell the machine at the end of its 6-year operating life for $10,000. (The percentages for the 5-year MACRS class are, beginning with year 1 and ending with year 6, 20%, 32%, 19%, 12%, 11%, and 6%.)
• The firm expects to be able to reduce net working capital by $15,000 when the machine is installed, but required working capital will return to the original level when the machine is sold after 6 years.
• Jayco's marginal tax rate is 40%, and it uses a 12% cost of capital to evaluate projects of this nature. Use this data for the next 4 questions.

What is the first year's modified accelerated cost recovery system (MACRS) depreciation?

A)   $12,000.

B)   $15,000.

C)   $10,000.

Correct answer is A)

The first year MACRS depreciation equals 60,000 × 20%, or 60,000 × 0.2 = 12,000.

 

Q11. What is the initial cash outlay?

A)   $75,000.

B)   $15,000.

C)   $45,000.

Correct answer is C)

Initial cash outlay = up-front costs (including cost) and changes in working capital. Here, the price of the machine is 60,000 and the working capital initally decreases 15,000 (which is a source of funds). Thus, the initial cash outlay = 60,000 cost ? 15,000 working capital = 45,000.

 

Q12. What is the first year's operating cash flow?

A)   $7,800.

B)   $4,800.

C)   $3,000.

Correct answer is A)

The first year's cash flow equals the after-tax impact of the 5,000 operating savings and the depreciation tax shield, or (5,000)(0.6) + (60,000)(0.2)(0.4) = 3,000 + 4,800 = 7,800.

 

Q13. What is the terminal year's cash flow (not counting the last year's operating cash flow)?

A)   $21,000.

B)   ($9000).

C)   ($4,000).

Correct answer is B)         

The terminal cash flow = [Sales (salvage) price ? book value] × (1 ? tax rate) ± change in working capital. Here, = (10,000 ? 0) × (1 ? 0.40) ? 15,000 (increased working capital is a use of funds) = 6,000 ? 15,000 = ?9,000.

 

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