Reference no: EM131926430

Question: 1. Middlefield Motors is evaluating project A, which would require the purchase of a piece of equipment for 325,000 dollars. During year 1, project A is expected to have relevant revenue of 194,000 dollars, relevant costs of 72,000 dollars, and some depreciation. Middlefield Motors would need to borrow 325,000 dollars for the equipment and would need to make an interest payment of 22,750 dollars to the bank in year 1. Relevant net income for project A in year 1 is expected to be 35,000 dollars and operating cash flows for project A in year 1 are expected to be 118,000 dollars. Straight-line depreciation would be used. What is the tax rate expected to be in year 1? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

2. Fairfax Paint operates stores in Virginia. The firm is evaluating the Vienna project, which would involve opening a new store in Vienna. During year 1, Fairfax Paint would have total revenue of 397,000 dollars and total costs of 276,000 dollars if it pursues the Vienna project, and the firm would have total revenue of 339,000 dollars and total costs of 252,000 if it does not pursue the Vienna project. Depreciation taken by the firm would be 76,000 dollars if the firm pursues the project and 48,000 dollars if the firm does not pursue the project. The tax rate is 45 percent. What is the relevant operating cash flow (OCF) for year 1 of the Vienna project that Fairfax Paint should use in its NPV analysis of the Vienna project?