Question : SHORT ANSWER. Write the word or phrase that best completes each : 1196199

 

SHORT ANSWER.

Write the word or phrase that best completes each statement or answers the question. 76)

Clock Manufacturing Company purchased a new piece of equipment at a cost of $60,000 at the beginning of the year. For tax purposes the machine is a Class 8 asset. The company has a 34 percent income tax rate. The CCA rate for Class 8 is 20%. Assume that the company has no other Class 8 assets during the period.

 

Required:

 

a.Compute the amount of tax savings from CCA for the first three years.

b.Compute the amount of tax savings from CCA for the first three years using a required rate of return of 12 percent.

76)

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77)

Tex Corporation trades in a class 10 (30%) asset during the current year. The opening UCC balance in the class 10 pool is $420,000. Tex trades in an asset for $25,000, which is deducted from the $125,000 price of the new machine (also class 10). The appropriate tax rate is 35% and the nominal after-tax rate of return is 10%.

 

Required: Calculate the UCC at the end of the year for class 10. 77)

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78)

Jasper Company Ltd. has a payback goal of three years on new equipment acquisitions.

Jasper is evaluating new equipment that costs $450,000, will have a CCA rate of 20%, an estimated useful life of 8 years,

and a zero terminal disposal price.

The company’s marginal tax rate is 40%.

 

Required:

Calculate the amount of after-tax savings in annual cash operating costs that must be generated by the new equipment in order to meet the company’s payback goal. 78)

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79)

Good Bread Bakery installed an oven costing $100,000 on January 1, 2001. Due to unexpected advances in technology, the equipment’s value was reduced to $24,000 in only one week. The equipment is class 8 which has a CCA rate of 20% for tax purposes. The incremental costs of operating the oven over four years is $80,000 annually, excluding amortization. A new replacement machine with all the new advances can be purchased now for $120,000. It also has a useful life of four years and can be operated for $30,000 a year, excluding amortization. The company’s tax rate is 40 percent. Neither oven has a salvage value at the end of the four years. Assume that the company will replace the oven (whichever one it chooses) after the four years.

Required:

a.Calculate the relevant cash flows using both a total project approach and a differential approach if the company’s internal rate of return is 10 percent.b.              What is the difference between the two methods? 79)

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80)

Avilas Corp. has a marginal tax rate of 25%, and is considering the following two capital projects:

 

Machine AMachine B

Cost$200,000$150,000

Additional annual revenue$220,000$80,000

Additional annual cash expense$140,000$30,000

Terminal salvage value 00

Required after-tax rate of return0%10%

Useful life of machine5 yrs.5 yrs.

CCA class 925%25%

 

Additional data (for interest rate of 10%, 5 periods):

 

Present value of $10.6209

Future value of $11.6105

Present value of annuity of$13.7908

Future value of annuity of$16.1051

 

Required:

 

Which project has a higher net after-tax present value? 80)

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81)

Bacon Jewelers are interested in buying a new stone-polishing machine for $25,000. The new machine will reduce stone polishing time substantially and annual operating costs are expected to be only $5,000. The current machine, with a fair market value of $10,000 and a book value of $15,000, has annual operating costs of $12,500. The current machine can be updated for a cost of $17,500. Because of advancing technology, neither the new machine nor the remodelled old machine is expected to last longer than four years. The new machine will have a salvage value after taxes of $500 but the remodelled machine will have a salvage value of zero. The company has a tax rate of 30 percent. For tax purposes, the equipment is class 8, which has a CCA rate of 20% .

 

Required:

 

Several categories of cash flows are common in capital budgeting analysis. Place as much information from this problem as possible in each one of the cash flow categories. 81)

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82)

Exar Construction Ltd is contemplating the purchase of new equipment. The equipment would cost $40,000, have an expected life of 8 years, and a zero terminal salvage value. The equipment would be class 8 (20% CCA rate), and would generate $125,000 additional revenue annually, and Exar would incur additional annual expenses of $115,000 for labour and material. The company’s marginal tax rate is 20%, and the required after-tax rate of return is 14%.

 

Additional data (for interest rate of 14%, 8 periods):

 

Present value of $10.3506

Future value of $12.8526

Present value of annuity of $14.6389

Future value of annuity of $113.2328

 

Required:

 

Calculate the net after-tax present value, and determine whether Exar should purchase the equipment. 82)

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83)

If the nominal rate of interest is 16% and the inflation rate is 5%, the real rate of interest (rounded to the nearest tenth of a percent) is: 83)

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84)

The strategic planning manager of Sports Discount Stores cannot decide how to project the real costs of opening a new store. He knows the capital investment that will be made but is not sure of the returns. In the retail business he knows there will be inflation most of the time. Both the selling prices and operating costs will increase to some degree. Sports Discount Stores has a required rate of return of 15 percent. It is anticipated that inflation will be 4 percent during the next few years. The company expects a new store to show a growth rate, without inflation, of 10 percent. First year sales are expected to be about $500,000.

 

Required:

 

a.What is the nominal rate of return for Sports Discount Stores?

b.What will the sales figure for year three be, assuming the strategic planner uses the real rate approach?

c.What will the sales figure for year three be, assuming the strategic planner uses the nominal rate approach? 84)

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