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Kaylis [27]
3 years ago
8

Sway's Market is considering a project that will require the purchase of $1.4 million in new equipment. The equipment will be de

preciated straight-line to zero over the 5-year life of the project. The firm expects to sell the equipment at the end of the project for 20 percent of its original cost. New net working capital equal to 10 percent of sales will be required to support the project. All of the new net working capital will be recouped at the end of the project. Annual sales are estimated at $750,000 with costs of $338,000. The required rate of return is 12 percent and the tax rate is 34 percent.What is the value of the depreciation tax shield in Year 2 of the project?
Business
1 answer:
hodyreva [135]3 years ago
7 0

Answer:

tax shield year 2 95,200

Explanation:

The tax shield will be the depreciation expense times tax rate

<u>Our first step is to calculate the depreciation expense:</u>

The equipment is worth 1.4 million and has a 5-years useful life

It is being depreciate on straight-line

depreciation per year

equipment / useful life

1.4 million / 5 = 0.28 = 280,000

<u>Now we apply the tax rate of 34%</u>

280,000 x 34% = 95,200

This will be the tax shield on Year 2

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Explanation:

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I used MS Excel solver to find this result, please download the excel spreadsheet attached to this answer.

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7 0
3 years ago
A drop in the market price of a firm's common stock will immediately affect its:
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3 years ago
Express the balance sheets in common-size percents. (Do not round intermediate calculations and round your final percentage answ
ArbitrLikvidat [17]

Answer:

SIMON COMPANY'S YEAR END BALANCE SHEET

AT DECEMBER 31                Current    1 yr ago    2 yrs ago

cash                   6.1%  8.1% 9.90%

Accounts receivables  16.6% 14.1% 13.2%

inventory           21.5% 18.9% 14.6%

prepaid expense   1.8%         2.1%  1.1%

plant asset           54.0% 56.8% 61.2%

Total Asset         100.0% 100.0% 100.0%

     

Liabilities and Equity      

Accounts payable   24.4% 17.1% 13.2%

Notes payable   18.6% 23.0% 22.5%

common stock   28.5% 33.1% 40.5%

Retained earnings   28.5% 26.9% 23.8%

total                    100.0% 100.0% 100.0%

2) The change in % of accounts receivables is unfavorable because this means that our Debtors are not paying instead are continuing to buy on credit and that our collection methods are weak and ineffective.

3) The % change in inventory is unfavorable because it means we are selling less stock as years goes by and that we are buying more than we are selling.

Explanation:

6 0
3 years ago
Kurt's Adventures, Inc. stock is quite cyclical. In a boom economy, the stock is expected to return 30% in comparison to 12% in
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Answer:

15.83%

Explanation:

Calculation to determine is the standard deviation of the returns on Kurt’s Adventures, Inc. stock

First step is to determine l E(r)

E(r) = (.30 *.30) + (.55 *.12) + (.15 *-.20)

E(r)= .09 + .066 -.03

E(r)= .126

Second step is to determine Var

Var = .30 *(.30 -.126)^2 + .55 *(.12 -.126)^2 + .15 *(-.20 -.126)

Var=0090828 +.0000198 + .0159414

Var= .025044

Now let determine the Std dev

Std dev = √.025044 = .15825

Std dev= 15.83 percent

Therefore the standard deviation of the returns on Kurt’s Adventures, Inc. stock.is 15.83 percent

6 0
2 years ago
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