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andreev551 [17]
3 years ago
10

You got asked to analyze a 5-year project for your firm. The project produces an annual revenue of $28,000, but requires an annu

al labor and materials cost of $6,000. To initiate the project your firm must invest $18,000. The salvage value of the project is $0 at the end of the 5-year useful life. Use straight line depreciation and a 40% income tax rate to compute the after-tax cash flows (15 points) and the IRR for the ATCF of this project
Business
1 answer:
irina [24]3 years ago
7 0

Answer:

The interest rate is i = 53.82%

Explanation:

Initail cost = 18.000

Salvage value = 0

Life = 5 years

Annual revenue = 28000

Annual cost = 6000

Net revenue = 28000 - 6000 = 22000

Tax rate = 40%

Depreciation per year = (Purchase value - Salvage value ) / life = 18000 / 5 = 3600

Taxable income = Net cash flow - Depreciation = 22000 - 3600 = 18400

Tax = Tax rate * Taxable income = 0.4 * 18400 = 7360

ATCF = Taxable income - Tax + Depreciation = 18400 - 7360 + 3600 = 10960

Let IRR be i%, then,

-18000 + 10960 * (P/A, i%, 5) = 0

(P/A, i%, 5) = 18000 / 10960 = 1.642336

Using trail and error method

When i = 50% , value of (P/A, i%, 5) = 1.736626

When i = 51% , value of (P/A, i%, 5) = 1.711012

When i = 53% , value of (P/A, i%, 5) = 1.661749

When i = 54% , value of (P/A, i%, 5) = 1.638054

Using interpolation

i = 53% + (1.661749 - 1.642336) / (1.661749 - 1.638054) *(54% - 53%)

i = 53% + 0.819%

i = 53.82%

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Answer:

5.37%

Explanation:

According to the scenario, computation of the given data are as follow:-

We can calculate the company’s after tax return on preferred by using following formula:-

Company’s After Tax Return = Before Tax Dividend Yield Rate on Preferred Stock × [1 - (1 - Dividend Exclusive) × (Tax Rate)]

= 6% × [1 - (1 - 70%) × (35%)]

= 0.06 × [1 - (1 - 0.70) × (0.35)]

= 0.06 × [1 - (0.30) × (0.35)]

= 0.06 × (1 - 0.105)

= 0.0537

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We simply applied the above formula to determine the company after tax return

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2 years ago
9-10. Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/14 and 12/31/15 containe
IceJOKER [234]

Answer:

Consider the following explanation

Explanation:

If these error are nit corrected, the income before taxes be overstated by $ 35,000 .

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3 years ago
Imagine you inherited $50,000, and you want to invest it to meet two financial goals: (a) to save for your wedding you plan to h
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Answer:

<u>Solution and Explanation:</u>

<u>Evaluation for investment decisions </u>

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CD – 24 months= Maturity period has met the criteria for short term goal and money used for their wedding

General electric bond – 18 months=Bonds are generally Long term or short term depends upon the maturity period for this bond has only 18 months maturity period

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Saving account = No obligation of any maturity period saving account is personal account

Short term junk Bonds = Short term junk bonds are for a short period of time

Energy sector mutual fund = This sector mutual fund has long term maturity period and thereafter returns in the long term

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Dow ETF ETF is retained for capital gains in the near future period but their gestation period is high

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3 years ago
In the challenging world of retail sales, Macy's, Inc.'s (M's) revenues are declining while expenses are generally flat. Based o
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Answer

a) Gordon's Constant Growth model : P0 = D1 / (r-g)

r = 3% =0.03 , g= -7% = -0.07 , D0 = $5.1

D1 = D0*(1+g)

D1 = 5.1*(1-0.07)

D1 = $4.743

P0 = 4.743/(0.03- (-0.07))

P0 = 4.743/0.10

P0 = $47.43

So, Stock M should sell at a price of $47.43 today

b) Price 8 years from now

==> P8 = D9/(r-g)

P8 = D0*(1+g)^9/(r-g)

P8 = 5.1* (1-0.07)^9 / (0.03- (-0.07))

P8 = 5.1*0.52041108298  / (0.03- (-0.07))

P8 = 2.65410

P8 = $26.54

c) Investor may want to buy the stock today for the Dividends. If the dividends paid are high enough, the present value of the dividends is also high and may more than compensate the fall in stock price. This type of stocks work and give cash flows like a project where the initial cashflows are higher and later cashflows are less because of market factors.

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