Question

Please solve, show work, and give detail explanation

Exam #2 Review Problems Chapters 9 and 6 10. If you dispose of an asset and its book value is greater than its salvage value, then you will have to pay taxes on the difference between the book value and salvage value. a. True b. False 11. Long-term bonds have more interest rate risk than do short-term bonds. a. True b. False 12. Bondholders demand an inflation premium to compensation them for the risk that the issuer will not be able to make all promised payments. a. True b. False Chapter 9 Review Problems 1. A firm is considering a project that will require $30,000 in net working capital and $94,000 in fixed assets. The project is expected to produce annual sales of $75,000 with associated costs of $46,000. The project has a 5-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35 percent. What is the operating cash flow each year for this project?

Answer 1

1.
False, book value is less than salvage value

2.
True

3.
False, default risk premium

4.
=(Sales-Costs-Fixed Assets/Project Life)*(1-tax rate)+Fixed Assets/Project Life
=(75000-46000-94000/5)*(1-35%)+94000/5
=25430