Determine the present value of the tax shield effect

Assignment Help Financial Accounting

Reference no: EM131293706

Rockyford Company must replace some machinery that has zero book value and a current market value of $2,800. One possibility is to invest in new machinery costing $50,000. This new machinery would produce estimated annual pretax cash operating savings of $20,000. Assume the new machine will have a useful life of four years and depreciation of $12,500 each year for book and tax purposes. It will have no salvage value at the end of four years. The investment in this new machinery would require an additional $4,000 investment of net working capital. (Assume that when the old machine was purchased the incremental net working capital required at the time was $0.)

If Rockyford accepts this investment proposal, the disposal of the old machinery and the investment in the new one will occur on December 31 of this year. The cash flows from the investment will occur during the next four calendar years.

Rockyford is subject to a 40% income-tax rate for all ordinary income and capital gains and has a 9% weighted-average after-tax cost of capital. All operating and tax cash flows are assumed to occur at year-end.

1. Determine the after-tax cash flow arising from disposing of the old machinery.

2. Determine the present value of the after-tax cash flows for the next four years attributable to the cash operating savings

3. Determine the present value of the tax shield effect of depreciation for year 1.

Reference no: EM131293706

Questions Cloud

Original journal entry to record issue of note receivable : On Jan 1, 2014 Xena provided services in exchange for a 2 year $100,000, 8% note receivable that pays interest quarterly. The customer's normal borrowing rate is 12%. Prepare a schedule with debits and credits through the life of the note. Prepare or..

Demonstrate ability to make and support argumentative claim : Demonstrate the ability to make and support an Argumentative claim in a well-supported, organized, and cohesive essay. Demonstrate ability to select credible and reliable sources for use in a well-supported and cohesive essay.

Prepare debits and credits through the life of the bond : On 7/1/14 sasha issued $2,000,000 12% bond, maturing in 5 years with a yield of 10% compounded semi annually. The bonds are accounted for under the effective interest method. At what amount were the bonds issued? Prepare debits and credits through th..

What is this investments net after-tax annual cash inflow : Dorothy & George Company is planning to acquire a new machine at a total cost of $64,800. The machine’s estimated life is six years and its estimated salvage value is $600. The company estimates that annual cash savings from using this machine will b..

Determine the present value of the tax shield effect : Rockyford Company must replace some machinery that has zero book value and a current market value of $2,800. One possibility is to invest in new machinery costing $50,000. This new machinery would produce estimated annual pretax cash operating saving..

Flexible budget is prepared to represent different levels : Which of the following is an example of the planning function of a? budget? Which of the following budgets focuses on the income statement and its supporting? schedules? The direct material budget is prepared on the basis of? the: Which of the follow..

What is critical path method : What is critical path method and what is a PERT?

Uses the fifo method of accounting for inventory : Fischer, Inc. had the following inventory in fiscal 2013. The company uses the FIFO method of accounting for inventory. Beginning Inventory, January 1, 2013: 130 units @ $10.00 Purchase 200 units @ $12.00 Purchase 50 units @ $9.00 Purchase 110 units ..

Calculate the purchases budget in dollars : Brooklyn Furniture, a retail store, has an average gross profit ratio of 45%. The sales forecast for the next four months follows: Management's inventory policy is to have ending inventory equal to 320% of the cost of sales for the subsequent month, ..

User Account

All Pages