BFN 110 Lecture Notes - Lecture 11: Capital Budgeting, Tunxis Community College, Income Statement

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coralimpala133

6 Jan 2021

School

Tunxis Community College

Department

Business – Finance

Course

BFN 110

Professor

garside

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Document Summary

Calculate an asset"s tax related cash flows such as depreciation and at disposal. Effect of tax should be considered in project evaluation. Assume tax is paid in the year the liability is incurred. All operating revenue is taxable and all operating costs are tax deductible. Purchase of assets aren"t tax deductible at the time of purchase but depreciation is allowed as a tax deduction. = pre tax cf (1-tc) + depreciation x tc. Not a cash outflow, but is tax deductible. Depreciation tax savings = depreciation x tc. Straight line: a constant % of asset value is written off each year. Can"t depreciate an asset"s value below 0. Diminishing value: a fixed % of the asset"s taxation book value is written off each year. In fbf, we use straight line depreciation only. Depreciation represents sum of depreciation charged to income statement in prior years. Depreciation charge for taxation may bear no relationship to the accounting charge.

Related Questions

A company wants to update their assets by buying some new machinery and selling some old equipment. The new machinery will cost $100,000 and will be depreciated using 3-year MACRS (33%, 45%, 15%, 7%). At the end of the third year, the machinery is expected to be sold for $10,000. The old equipment was bought three years ago for $60,000 and was being depreciated over four years using straight-line depreciation. It can be sold today for $10,000. If they do not buy the new machinery and replace the old equipment, then the old equipment is expected to be held for another three years at which point it will be worthless. Regardless of whether they buy the new machinery, Sales will be $500,000 for the next three years, but COGS will fall from 70% of Sales to 60% of Sales if they buy the new machinery. The tax rate is 40%.

Balance Sheet Effects ......|-----------Depreciation Expenses------------|

Today ---------------------------Year 1 Year 2 Year 3 --------------------------End

1. Buy New Assets

2. Sell Old Assets

Income Statement Effects... Year 1 Year 2 Year 3

Net Sales

-Net COGS

-Net Depreciation

= Net OEBT

- Net Taxes

= Net OEAT

+ Net Depreciation

= Net Operating CF

11. What is the Net Investment (Initial Cash Outflow or CF0) for this project?

12. What is the Depreciation Expense in year one?

13. What is the Operating Cash Flow in year two for this project?

14. What is the after tax salvage value of selling the new machinery in three years?

Firm purchases materials for $200 for cash--entries to reflect this:

Most businesses, for tax purposes, prefer to depreciate assets using ___ because

	a.	accelerated depreciation; get the cash flow benefit sooner
	b.	Straight line depreciation; better reflects the declining value of assets
	c.	Straight-line depreciation; better tax benefit this way
	d.	Accelerated depreciation; slower write off of allowable deductions

3. A company reports the following:

Long-term debt	4,000
Retained earnings	1,000
APIC	150
Current portion of long term debt	300
Accounts payable	1,200
Short-term notes payable	400
Common stock	500
Accruals	600
Treasury stock	250

What is stockholder's equity?

Long-term debt	4,000

Retained earnings	1,000
APIC	150
Current portion of long term debt	300
Accounts payable	1,200
Short-term notes payable	400
Common stock	500
Accruals	600
Treasury stock	250

What are total current liabilities?

Tax rate = 35%	2012	2013	2014
Taxable income	2,000	2,500	-1,500
Taxes paid	-700	-875	0

How much of a tax refund will be received in 2012 and 2013?

6. Net income is 1,024. Interest expense totals 171, while EBITDA is 2,318. If taxes are 563, what is depreciation and amortization (DA) ?

7.Beginning equity for a company is 188, and ending equity is 200. The company sold stock in the amount of 128, and net income is 83. Given this information, how much did the company pay in dividends this year?

8.A business purchases depreciable equipment for 191, and sells it a few years later for 166. At the time of the sale, accumulated depreciation totals 106. If the company's tax rate is 39, what is the total after tax cash flow that will result from selling this asset?

greencat205

The following is a Financial Management problem I was assigned, and I am SO LOST! Please, can someone help me with filling in the info after the question and show me how to get the answers to fill in, and also show me how to get the answers for the 4 questions at the bottom? I'm REALLY HAVING TROUBLE understanding how to get the total cash flows, incremental cash flows, etc. THANK YOU!!!

Alliance is considering automating their production process to become more efficient. In order to do so they will buy a new monorail manufacturing system at a cost of $500,000. The system will be depreciated using seven-year MACRS (15%, 25%, 17%, 12%, 9%, 9%, 9%, 4%). The system will be sold in five years for $200,000. If they buy the system they will Trade In their current trolleys for $100,000. The trolleys were originally bought four years ago for $500,000 and are being depreciated using straight-line depreciation over five years. If Alliance does not replace the trolleys, they will be kept for the next five years when they will be sold for $10,000. The new system will not affect Allianceâs sales but will reduce Costs of Goods Sold by $1,000,000. However, Fixed Costs will rise by $50,000 per year if the monorail system is installed. The tax rate is 40% and the WACC is 10%. What are the incremental cash flows associated with this proposed project?

Balance Sheet Effects |----------Depreciation Expenses-------------|

Today Year 1 Year 2 Year 3 Year 4 Year 5 End

1. Buy New Assets

2. Trade In Old Assets

3. Keep Old Assets

4. Change in NWC

Income Statement Effects

Year 1 Year 2 Year 3 Year 4 Year 5

Net Sales

- Net COGS

- Net Depreciation

- Net Fixed Costs

= Net OEBT

- Net Taxes

= Net OEAT

+ Net Depreciation

= Net Operating CF

Total Cash Flows

CF0 =

C01 =

C02 =

C03 =

C04 =

C05 =

C06 =

Homework Questions:

1. What is the Initial Cost of this project?

A. $300,000

B. $400,000

C. $500,000

D. $600,000

2. What is net depreciation expense on the income statement in Year 1?

A. -$75,000

B. -$25,000

C. $100,000

D. $175,000

3. What is the After Tax Salvage Value of selling the equipment at the end?

A. $164,000

B. $182,000

C. $218,000

D. $236,000

4. What is the Operating Cash Flow in Year 2

A. $430,000

B. $510,000

C. $560,000

D. $620,000

Please email, text, or call me.

Thank you

Kimberly Deshotels

[email protected]

318-787-8211

orchidwildebeest290

BFN 110 Lecture Notes - Lecture 11: Capital Budgeting, Tunxis Community College, Income Statement

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