What would be impact a tax rate of 40 percent

Assignment Help Portfolio Management

Reference no: EM13214393

A private energy trading company is considering the acquisition of a heavy crude container. This is to handle a variety of stocks that are expected to last for the next 5 years. The cost of the project is estimated to be 35 crores with an estimated life of 5 years. The machine is eligible for depreciation at the rate of 20% per annum on straight line basis with a scrap value of 5 crores. The benefits from the investment (Profit after Depreciation but before Tax) during its life of 5 years are estimated to be as follows:

Profit Before Tax

(in crores)

75,000,000

78,000,000

80,000,000

84,000,000

86,000,000

The company proposes to finance the investment with a secured bank loan of 10 crores repayable at the end of the fifth year and carrying an interest of 12% per annum. The bank also charges 2% of the loan amount as service/processing charges. The port authority has approached a financial institution for loan to the tune of 15 crores. The financial institution has agreed to provide 15 crores against secured redeemable debentures of Rs. 100/- face value to be redeemed at the end of the fifth year. It has further proposed that the debentures to be issued at a discount of 5%, redeemable at 5% premium, and carrying 11% interest per annum. The remaining amount of 5 crores is taken from undistributed profits of the firm. The present cost of equity (K_e) for the firm stands at 18%.

The firm is in the tax bracket of 33% and it is estimated to remain same for the next 5 years.

Considering the above information, you are required to suggest the firm on the investment proposal. What would be impact if a tax rate of 40% is considered for the project?

Reference no: EM13214393

Questions Cloud

Explain what is the mass of the sphere if lead has density : A spherical ball of lead has a diameter of 6.5 cm. What is the mass of the sphere if lead has a density

Role to play in the capital-budgeting process : Do Annual profits have any role to play in the capital-budgeting process and how should we allow for depreciation in making this capital investment and what is the significance of the Australian Tax system for our company when it makes capital-budget..

Would a regulation increases marginal cost of fishing effort : When trying to reduce the degree of inefficiency from an open-access fishery, would a regulation that increases the marginal cost of fishing effort by banning certain types of gear or a tax on effort be equally efficient.

Determine the fishery is private property : In the economic model of the fishery developed in this chapter, compare the effect on fishing effort of an increase in cost of a fishing license with an increase in a per-unit tax on fishing effort that raises the same amount of revenue. Assume th..

What would be impact a tax rate of 40 percent : You are required to suggest the firm on the investment proposal. What would be impact if a tax rate of 40% is considered for the project?

Discuss the impact on profitability in both situations : An accident has occurred in which chemicals leaked into the ground water nearby, the community is unaware. Assess the costs involved in cleaning up the water immediately (confessing) versus hiding the fact.

How management would implement the recommendations : Speculate how the price for that good or service may have been set and how well this price maximizes profit for the company and determine what shifts the company should made in its pricing strategy. Provide support for your recommendations.

Determine the offering price of an ipo : If you were an investment banker, how would you determine the offering price of an IPO and differentiate between direct and indirect costs of bankruptcy. Which of the two is generally more significant?

Compute the free cash flow : Performing a financial analysis through the use of ratios and computing the free cash flow for the most recent year for which information could be found

User Account

All Pages