Calculate the cca allowance anfd the pv of tax shield , Financial Management

Assignment Help:

Home Inc. is considering buying a new piece of equipment, which will cost $715,000 and has an economic life of 5 years, in order to produce a new line of product.  The company believes they can sell 25,000 units of this new product per year at $130 per unit in each of next 5 years.  The unit variable cost is $110 and total fixed costs (excluding CCA) are $195,000 per year.

The CCA rate for the new equipment is 30% and Home Inc. is going to claim the maximum CCA in each of the next 5 years.

Home Inc. needs to invest $140,000 in net working capital up front which will be fully recovered at the end of 5 years.

The equipment is estimated to be sold at its UCC value at the end of 5 years.

The discount rate is 15% and the tax rate is 35%.

Requirements: Show your calculation

a. Calculate the CCA allowance and ending UCC in each of the 5 years.

b. Calculate the net income and operating cash flow of this new product for each of the 5 years.

c. Calculate the initial investment outlay.

d. Calculate the PV of tax shield on CCA.

e. Determine whether Home Inc. should invest in the new equipment using NPV as the evaluation method.

 


Related Discussions:- Calculate the cca allowance anfd the pv of tax shield

Sophisticated methods of mortgage backed security valuation, MBS ...

MBS are the most complicated securities that are sensitive to interest rates. The factors that affect the price of MBS are varied and most of th

Public corporations ought to tender audited financial statem, What are some...

What are some of the government requirements imposed on a public corporation that are not imposed on a private, closely held corporation? Public corporations ought to tender au

Explain the internalization theory of fdi, Normal 0 false fal...

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

State the factors of tests of controls, State the factors of Tests of contr...

State the factors of Tests of controls Tests of controls may include · Enquiries and observations corroborating internal control functions. Inspection of docu

Bond's capital gain yield, A 10-year, 12% semi-yearly coupon bond with a pa...

A 10-year, 12% semi-yearly coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,050. The bond sells for $1,050. (Suppose that the bond has just bee

Define coefficient of variation often a better risk measure, Why is the coe...

Why is the coefficient of variation often a better risk measure when comparing different projects than the standard deviation? While we want to compare the risk of investments whi

Describe in brief about finance, Describe in brief about  finance Mana...

Describe in brief about  finance Managing this flow of funds resourcefully is the purview of finance. So we can describe finance as the study of the methods that help us plan,

Periodic system, limitations of using a periodic inventory system

limitations of using a periodic inventory system

What the term objective denotes- financial management, What the term object...

What the term objectives denotes- financial management It must be noted at the outset that term 'objective' is used in the sense of a goal or decision criterion for three decis

Financial derivatives, Do you provide plaigerism free solutions to question...

Do you provide plaigerism free solutions to questions or do you only tutor?

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd