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- Wiley - Chapter 12: Intangible Assets
- Accounting Treatment of Depreciation
- Depreciation
- SAPM
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- Economics
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Remaining useful life 5 years

Annual straight-line depreciation $ 24,000

Current market value $ 70,000

If the company sells the machine its cash operating expenses will increase by $30,000 per year due to

an operating lease. The tax rate is 40%.

b. Calculate the increase in annual net cash outflows as a result of selling the machine.

2. Pepin Company is considering replacing a machine that has the following characteristics.

Remaining useful life 5 years

Annual straight-line depreciation $ ???

Current market value $ 60,000

The replacement machine would cost $150,000, have a five-year life, and save $50,000 per year in

cash operating costs. It would be depreciated using the straight-line method. The tax rate is 40%.

b. Compute the increase in annual income taxes if the company replaces the machine.

c. Compute the increase in annual net cash flows if the company replaces

3. Cable Company is considering the purchase of a machine with the following characteristics.

Cost $100,000

Useful life 10 years

Expected annual cash cost savings $30,000

Cable's income tax rate is 40% and its cost of capital is 12%. Cable expects to use straight-line

depreciation for tax purposes.

a. Compute the expected increase in annual net cash flow for this project.

c. How would the profitability index for this project be affected if Cable were to use MACRS depreciation

for tax purposes and the machine fell into the 7-year MACRS class? (increase decrease not

affected) Circle the appropriate answer.

Frank Co. has the opportunity to introduce a new product. Frank expects the product to sell for $60 and

to have per-unit variable costs of $35 and annual cash fixed costs of $4,000,000. Expected annual

sales volume is 275,000 units. The equipment needed to bring out the new product costs

$6,000,000, has a four-year life and no salvage value, and would be depreciated on a straight-line

basis. Frank's cost of capital is 14% and its income tax rate is 40%.

b. Compute the NPV of the project.

c. Suppose that some of the 275,000 units expected to be sold would be to customers who currently

buy another of Frank's products, the X-10, which has a $12 per-unit contribution margin. Find the

sales of X-10 that can Frank lose per year and still have the investment in the new product return

at least the 14% cost of capital.

d. Suppose that selling the new product has no complementary effects but that Frank's production

engineers anticipate some production problems in making the new product and are not confident

of the $35 estimate of per-unit variable costs for the new product. Find the amount by which

Frank's estimate of per-unit variable cost could be in error and the investment still have a return

at least equal to the 14% cost of capital.

Cost $240,000

Useful life 10 years

Annual straight-line depreciation $ ???

Expected annual savings in cash

operation costs $ 80,000

Additional working capital needed $100,000

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