1. A. Kennedy Air Services is now in the final year of a project. The equipment originally cost $20 million, of which 90% has been depreciated. Kennedy can sell the used equipment today for $6 million, and its tax rate is 30%. What is the equipment’s after-tax salvage value?
1. B.
Eh Systems is considering a project with the following cash flows. What’s its MIRR?
1. C.
A company’s weighted average cost of capital is 11% per year. A project requires an investment cost of $4,800 today and it is expected to generate free cash flows of $2,000 per year for the next five years. What is the project’s equivalent annual annuity (EAA)?
1. D.
Percy Motors has a target capital structure of 40% debt and 60% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 9%, and its tax rate is 40%. Percy's CFO estimates that the company's WACC is 10.96%. What is Percy's cost of common equity?
Solution:-
To Calculate After Tax Salvage Value -
Book Value at the year end = $20 Million * (1-0.90)
Book Value at the year end = $2 Million
Salvage Value = $6 Million
Capital Gain = Book Value at the year end - Salvage Value
Capital Gain = $6 Million - $2 Million
Capital Gain = $4 Million
Tax on Capital Gain = Capital Gain * Tax Rate
Tax on Capital Gain = $4 Million * 30%
Tax on Capital Gain = $1.20 Million
After Tax Salvage Value = Salvage Value - Tax on Capital Gain
After Tax Salvage Value = $6 Million - $1.20 Million
After Tax Salvage Value = $4.80 Million
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1. A. Kennedy Air Services is now in the final year of a project. The equipment...
Kennedy Air Services is now in the final year of a project. The equipment originally cost $20 million, of which 80% has been depreciated. Kennedy can sell the used equipment today for $6 million, and its tax rate is 30%. What is the equipment’s after-tax salvage value? A) 5.4 million B) 4.6 million C) 4.8 million D) 5.0 million E) 5.2 million
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