10-1 Canadian Wilderness Company(CWC) just bought a machine that is expected to generate $25,000 in operating income before depreciation expenses each year. The machine, which has a depreciable basis equal to $60,000, falls into the MACRS 3-year class. What will be CWC's (a) after-tax operating income and (b) operating cash flow for both this year (Year 1) and three years from now (Year 3)? Assume that all sales and operating expenses, except depreciation, are cash. CWC's marginal tax rate is 40 percent.
10-2 Dave's Devilish Dogs(3D) expects to generate $92,000 in sales in the long term. 3D's operating costs, exclud- ing depreciation, are 75 percent of sales. The company has only one asset, a machine that was just purchased for $150,000. The machine will be depreciated accord- ing to the MACRS 3-year class of assets. 3D's marginal tax rate is 35 percent, and it has no debt. Compute the company's (a) net income and (b) after-tax operating cash flow for the next four years.
10-4 Xavier Corporation plans to purchase a new machine to replace an older machine on its assembly line. The new machine's purchase price is $500,000, and it will cost $75,000 to have the new machine shipped and installed. The old machine, which is fully depreciated, can be sold to another company for $45,000. The new machine falls into the MACRS 5-year class. Compute the depreciation expense associated with the new machine for the next five years?
10-5 Western Textiles is trying to determine whether to purchase a new weaving machine that costs $214,000. It would cost another $26,000 to install the machine. Western plans to use the machine for four years and then sell it for $80,000. The machine falls into the MACRS 5-year class. (a) What will be the depreciation associated with the machine each year Western uses it? (b) If its marginal tax rate is 40 per- cent, what after-tax net cash flow will Western receive when the machine is sold in four years?
10-8 Cool Cat Cabinets (CCC) is evaluating whether to replace an aging machine. The existing machine is being depreciated at $40,000 per year, whereas the depreciation for a new machine is expected to be $35,000 per year. CCC's operating income, excluding depreciation, is expected to be $90,000 no matter which machine is used. The firm's marginal tax rate is 40 percent. If the new machine is purchased, what effect will the change in depreciation have on the firm's (a) net income and (b) supplemental operating cash flows. CCC has no debt.
10-16 Logic Legal Leverage (LLL) is evaluating a project that has a beta coefficient equal to 1.3. The risk-free rate is 3 percent and the market risk premium is 6 percent. The project, which requires an investment of $405,000, will generate $165,000 in after-tax operating cash flows for the next three years. Should LLL purchase the project?