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# 1- You are a part of a finance team in a firm, and you were asked...

1- You are a part of a finance team in a firm, and you were asked by your boss to estimate the annual cash flows of a project. You estimated that the annual sales and costs of this project is \$150,000 and \$25,000 respectively. In order to start the project, the firm needs to invest in \$300,000 in new equipment including shipping and installation, and \$30,000 in working capital. The life of this asset is 3 years, and the project will be terminated after 3 years of operations. The equipment will depreciate via simplified straight-line method, and the estimated market value of the machine in 3 years is \$20,000. The firm has a marginal tax rate of 22%. What is the terminal cash flow of this project? Round to the nearest penny. Do not include a dollar sign in your answer.

2- You are evaluating a capital project for equipment with a total installed cost of \$750,000. The equipment has an estimated life of 30 years, with an expected salvage value at the end of the project of \$50,000. The project will be depreciated via simplified straight-line depreciation method. In addition, a working capital investment of \$5,000 is required. The project replaces an old piece of equipment which is currently in service and is fully depreciated, but has an expected after-tax salvage value of \$12,000. After replacing the old equipment, cash savings from decreased operating expenses are expected to amount of \$200,000 per year. The firm;s marginal tax rate is 40 percent and the project cost of capital is 10%. What is the net present value of this project? Round to the nearest penny. Do not include a dollar sign in your answer.

 Answer 1 Calculation of terminal cash flow of the project Year 3 Sale value of equipment 20,000.00 Tax @ 22% of Gain on sale of equipment -4,400.00 Recovery of working capital 30,000.00 Terminal Cash flow of the project 45,600.00 Answer 2 Calculation of net present value of project Year 0 1 - 29 30 Investment in equipment -750,000 Investment in working capital -5,000 after tax salvage value of old equipment 12,000 Recovery of working capital 5,000 Sale value of equipment 50,000 Tax @ 40% of Gain on sale of equipment -20,000 Cash savings in Operating expenses 200,000 200,000 Tax @ 40% on Savings -80,000 -80,000 Depreciation Tax shield 9,333 9,333 Net Cash flow -743,000 129,333 164,333 X Discount Factor @ 10% 1.00000 9.36961 0.05731 Present Values -743,000 1,211,799 9,418 Net present value of project 478,217 Working Calculation of depreciation tax shield Depreciation per year = (Cost - salvage value)/useful life = (750000 - 50000)/30 years = 23,333 Depreciatio tax shield = Depreciation per year x tax rate = 23,333 x 40% = 9,333

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