Log in
HomeTextbook Notes300,000CA170,000

AFM273 Chapter 9: Fundamentals of Capital Budgeting

72 views5 pages
OC2146671
14 Nov 2018
School
University of Waterloo
Department
Accounting & Financial Management
Course
AFM273
Professor
Xuyang Ma

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

Forecasting earnings: capital budget: lists the projects and investments that a company plans to undertake during the coming year, capital budgeting: analyze alternate projects and decide which ones to accept, forecasts of the project"s future consequences. Incremental earnings: amount by which the firm"s earnings are expected to change as a result of the investment decision. Full cost is denoted as capex: one-half of the cost is added to the undepreciated capital cost (ucc) for the asset pool (collection of assets in the same class, (cid:1847)(cid:1829)(cid:1829)(cid:2869)=(cid:882). 5 (cid:1876) (cid:1829)(cid:1853)(cid:1868)(cid:1831)(cid:1876, (cid:1829)(cid:1829)(cid:1827)(cid:3047)=(cid:1847)(cid:1829)(cid:1829)(cid:3047) (cid:1876) (cid:1856) the cca deduction. Free cash flow: incremental effect of a project on the firm"s available cash, separate from any financing decisions. Net working capital (nwc: (cid:1840)(cid:1857)(cid:1872) (cid:1849)(cid:1867)(cid:1870)(cid:1863)(cid:1866)(cid:1859) (cid:1829)(cid:1853)(cid:1868)(cid:1872)(cid:1853)(cid:1864) (cid:4666)(cid:1840)(cid:1849)(cid:1829)(cid:4667)=(cid:1829)(cid:1873)(cid:1870)(cid:1870)(cid:1857)(cid:1866)(cid:1872) (cid:1827)(cid:1871)(cid:1871)(cid:1857)(cid:1872)(cid:1871) (cid:1829)(cid:1873)(cid:1870)(cid:1870)(cid:1857)(cid:1866)(cid:1872) (cid:1838)(cid:1853)(cid:1854)(cid:1864)(cid:1872)(cid:1857)(cid:1871)=(cid:1829)(cid:1853)(cid:1871)h+ (cid:1866)(cid:1874)(cid:1857)(cid:1866)(cid:1872)(cid:1867)(cid:1870)(cid:1877)+(cid:1844)(cid:1857)(cid:1855)(cid:1857)(cid:1874)(cid:1853)(cid:1854)(cid:1864)(cid:1857)(cid:1871) (cid:1853)(cid:1877)(cid:1853)(cid:1854)(cid:1864)(cid:1857)(cid:1871) Increase in net working capital in year t. Liquid or salvage value remains positive: negative net additions: assume in the tax year of the asset sale that future purchases.

Get access

Grade+
$40 USD/m
Billed monthly
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
10 Verified Answers
Class+
$30 USD/m
Billed monthly
Class+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
7 Verified Answers

Related Documents

AFM273 Lecture Notes - Lecture 9: Sensitivity Analysis, Scenario Analysis, Capital Gains Tax
amaranthporcupine288
AFM273 Chapter Notes - Chapter 7: Tax Shield, Externality, Capital Budgeting
coffeezebra978
Management and Organizational Studies 2310A/B Chapter Notes - Chapter 9: 0 (Year), General Instruction Of The Roman Missal, Cash Flow
byzantiumwoodchuck79

Related Questions

Lori, who is single, purchased 5-year class property for $200,000 and 7-year class property for $410,000 on May 20, 2017. Lori expects the taxable income derived from her business (without regard to the amount expensed under § 179) to be about $800,000. Lori wants to elect immediate § 179 expensing, but she doesn't know which asset she should expense under § 179. She does not claim any available additional first-year depreciation. Click here to access Exhibit 8.1 and the depreciation table to use for this problem. If an amount is zero, enter "0".

a. Determine Lori's total cost recovery deduction if the § 179 expense is first taken with respect to the 5-year class asset. 5-year class property

Immediate expense deduction under § 179 $

Regular MACRS 7-year class property Immediate expense deduction under § 179 $

Regular MACRS Total deduction $

b. Determine Lori's total cost recovery deduction if the § 179 expense is first taken with respect to the 7-year class asset. 7-year class property Immediate expense deduction under § 179 $ Regular MACRS 5-year class property Immediate expense deduction under § 179 $ Regular MACRS Total deduction $

c. If § 179 expense is first allocated to the seven-year class property, the deduction for the year would be $

larger. For parts d. and e. Assume a 6% discount rate The present value factors for a 6% discount rate are as follows: Year 1: 1.000, Year 2: 0.9434; Year 3: 0.8900, Year 4: 0.8396, year 5: 0.7921, Year 6: 0.7473, Year 7: 0.7050, Year 8: 0.6651. Hint: Set up two analysis - on to find present value of tax saving with Section 179, and one without Section 179. Then compare them. If required, round computations to the nearest dollar. d.

Assume that Lori is in the 25% marginal tax bracket and that she uses § 179 on the 7-year asset. The present value of the tax savings from the depreciation deductions for both assets $ .

e. Assume that Lori is in the 25% marginal tax bracket and that Lori decides not to use § 179 on either asset. The present value of the tax savings generated by using the § 179 deduction on the 7-year asset $ .

Lori, who is single, purchased 5-year class property for$200,000 and 7-year class property for $410,000 on May 20, 2017.Lori expects the taxable income derived from her business (withoutregard to the amount expensed under § 179) to be about $800,000.Lori wants to elect immediate § 179 expensing, but she doesn't knowwhich asset she should expense under § 179. She does not claim anyavailable additional first-year depreciation. Click here to accessExhibit 8.1 and the depreciation table to use for this problem. Ifan amount is zero, enter "0". a. Determine Lori's total costrecovery deduction if the § 179 expense is first taken with respectto the 5-year class asset. 5-year class property Immediate expensededuction under § 179 $ Regular MACRS 7-year class propertyImmediate expense deduction under § 179 $ Regular MACRS Totaldeduction $ Feedback b. Determine Lori's total cost recoverydeduction if the § 179 expense is first taken with respect to the7-year class asset. 7-year class property Immediate expensededuction under § 179 $ Regular MACRS 5-year class propertyImmediate expense deduction under § 179 $ Regular MACRS Totaldeduction $ Feedback Correct c. If § 179 expense is first allocatedto the seven-year class property, the deduction for the year wouldbe $ larger. Feedback Correct For parts d. and e. Assume a 6%discount rate The present value factors for a 6% discount rate areas follows: Year 1: 1.000, Year 2: 0.9434; Year 3: 0.8900, Year 4:0.8396, year 5: 0.7921, Year 6: 0.7473, Year 7: 0.7050, Year 8:0.6651. Hint: Set up two analysis - on to find present value of taxsaving with Section 179, and one without Section 179. Then comparethem. If required, round computations to the nearest dollar.

d. Assume that Lori is in the 25% marginal tax bracketand that she uses § 179 on the 7-year asset. The present value ofthe tax savings from the depreciation deductions for both assets $.Feedback Incorrect

e. Assume that Lori is in the 25% marginal tax bracketand that Lori decides not to use § 179 on either asset. The presentvalue of the tax savings generated by using the § 179 deduction onthe 7-year asset $.

pls help to solve part E

Without considering the following capital gains and​ losses,Cathy, who is​ single, has taxable income of $430,000 and amarginal tax rate of 39.6%. During the​ year, she sold stock heldfor nine months at a gain of $17,000​; stock held for three yearsat a gain of $13,000​; and a collectible asset held for six yearsat a gain of $22,000. Ignore the effect of the gains on anythreshold amounts and assume that her marginal tax rate of 39.6 %.39.6% does not change.

Requirement a. What is her taxable income and the increase inher tax liability after considering the three​ gains? Her taxableincome is $ What is the increase in her tax liability afterconsidering the three​ gains? Category Taxable amount Rate Tax NetSTCG 17000 20% 3400 Net LTCG (ANCG) 13000 20% 2600 Net gains fromcollectibles 22,000 20% 4400 Increase in tax liability 10400

Requirement b. In addition to the above three​ sales, assumethat she sells another asset and has a STCL of $22,000. What is hertaxable income and the increase in her tax liability afterconsidering the four​ transactions? Her taxable income is $ . Whatis the increase in her tax liability after considering the four​transactions? First select the label for the applicable categoryof​ gains, then enter the taxable amount. In the last columncompute the tax for each category and the increase in taxliability. ​(Abbreviations used . Enter the net taxable amount foreach category. If a box is not used in the table leave the box​empty; do not select a label or enter a​ zero.) Category Taxableamount Rate Tax Increase in tax liability

Requirement c. In addition to the above three sales in Part​ a,assume that she sells another collectible asset held seven years asan investment and has a $29,000 capital loss. What is her taxableincome and the increase in her tax liability after considering thefour​ transactions? Her taxable income is $ . What is the increasein her tax liability after considering the four​ transactions?First select the label for the applicable category of​ gains, thenenter the taxable amount. In the last column compute the tax foreach category and the increase in tax liability. ​(Abbreviationsused . Enter the net taxable amount for each category. If a box isnot used in the table leave the box​ empty; do not select a labelor enter a​ zero.) Category Taxable amount Rate Tax Increase in taxliability

Requirement d. Determine her medicare tax on net investmentincome in​ (a) if all of the $430,000 of taxable income is due tosalary. Her medicare tax on net investment income, from Requirementa, is $ because all of the $430,000 of taxable income is due tosalary.