FIN 401 Study Guide - Midterm Guide: Net Present Value, Payback Period, Tax Shield

• School: Ryerson University
• Department: Finance
• Course: FIN 401
• Professor: Samuel Alaguarajah

Document Summary

350 taxes=350*0. 4=140, ni: 350-140 / ocf = ebit+d- Cost cuing steps: (1) determine capital spending (iniial, salvage), (2) nwc, (3) opcf calc: ccats=idtc/r+d * 1+(0. 5*r)/1+r sdtc/r+d * 1/(1+r)^n, pv of at op saving: Replace: original data: i=100,000; cca=20%; bought 5 yrs ago; s(today): 65,000; s(5yrs):10,000; new data: I=150,000;n=5; cost savings:50,000/year;cca:10%; general: r=10%, tc=40% npv=-150,000 + 65,000 + 50,000(1-0. 4)[1 (1/1. 10^5)/0. 10 10,000/1. 10^5 (65,000 * 0. 2 * 0. 4)/ (0. 10+0. 20) * 1+0. 5(0. 1)/1. 10 + 10,000*0. 2*0. 4/0. 1+0. 2 * 65,000; life=8; machine b: i=100,000; pretax op cost: 57,500; life=6. 39,000/1. 10^1 + + 39,000/1. 10^8 = 208062. 1217; ccats: (150,000*0. 2*0. 4)/0. 2+0. 1 * (1+0. 5(0. 10)/1. 10)=38,182. Bid price pv iniial: -60,000; pv of salvage= 0. 435)=139,712. 2287; 139,712. 2287/5=27942. 44575; therefore, each truck should be sold for at least 27,942. Example 2: cost: 5m; cca:29%;s=500,000; life=4; tax=36%; borrow: 7%; atborrow: 4. 48%; pmt: 1,160,000; lease: start Rd)(d/e); implicaion: 1) cost of equity rises with increase to debt; 2) risk of equity relies on risk of ops and degree of leverage. With tax prop 1: value of levered = unlevered+pv.