BASIC PROBLEMS 121   AfterTax Cash Flow from Sale of Assets Suppose you sell a fixed asset for $109,000 when its book value is $129,000. If your company's marginal tax rate is 39 percent, what will be the effect on cash flows of this sale (i.e., what will be the aftertax cash flow of this sale)? (LG3)  122   PV of Depreciation Tax Benefits Your company is considering a new project that will require $1 million of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $150,000 using straightline depreciation. The cost of capital is 13 percent, and the firm's tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation. (LG4)  123   EAC Approach You are trying to pick the leastexpensive car for your new delivery service. You have two choices: the Scion xA, which will cost $14,000 to purchase and which will have OCF of −$1,200 annually throughout the vehicle's expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $20,000 to purchase and which will have OCF of −$650 annually throughout that vehicle's expected fouryear life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 12 percent, which one should you choose? (LG7)  124   EAC Approach You are evaluating two different cookiebaking ovens. The Pillsbury 707 costs $57,000, has a fiveyear life, and has an annual OCF (after tax) of −$10,000 per year. The Keebler CookieMunster costs $90,000, has a sevenyear life, and has an annual OCF (after tax) of −$8,000 per year. If your discount rate is 12 percent, what is each machine's EAC? (LG8)  125   EAC Approach You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $80 initially, and then $125 per year in maintenance costs. Machine B costs $150 initially, has a life of three years, and requires $100 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. Which is the better machine for the firm? The discount rate is 12 percent and the tax rate is zero. (LG8) 
INTERMEDIATE PROBLEMS 126   Project Cash Flows KADS, Inc. has spent $400,000 on research to develop a new computer game. The firm is planning to spend $200,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of three years, a $75,000 estimated resale value, and falls under the MACRS sevenyear class life. Revenue from the new game is expected to be $600,000 per year, with costs of $250,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the cash flows for this project be? (LG3) 
p. 291 127   Depreciation Tax Shield Your firm needs a computerized machine tool lathe which costs $50,000 and requires $12,000 in maintenance for each year of its threeyear life. After three years, this machine will be replaced. The machine falls into the MACRS threeyear class life category. Assume a tax rate of 35 percent and a discount rate of 12 percent. Calculate the depreciation tax shield for this project in year 3. (LG4)  128   AfterTax Cash Flow from Sale of Assets If the lathe in the previous problem can be sold for $5,000 at the end of year 3, what is the aftertax salvage value? (LG4)  129   Project Cash Flows You have been asked by the president of your company to evaluate the proposed acquisition of a new specialpurpose truck for $60,000. The truck falls into the MACRS threeyear class, and it will be sold after three years for $20,000. Use of the truck will require an increase in NWC (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in beforetax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. What will the cash flows for this project be? (LG6) 
ADVANCED PROBLEMS 1210   Change in NWC You are evaluating a project for The Tiffany golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiffany to be $400 per unit and sales volume to be 1,000 units in year 1; 1,500 units in year 2; and 1,325 units in year 3. The project has a threeyear life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 in assets, which will be depreciated straightline to zero over the threeyear project life. The actual market value of these assets at the end of year 3 is expected to be $35,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 10 percent. What change in NWC occurs at the end of year 1? (LG3)  1211   Operating Cash Flow Continuing the previous problem, what is the operating cash flow for the project in year 2? (LG3)  1212   Project Cash Flows You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $400 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and 1,325 units in year 3. The project has a threeyear life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 in assets, which will be depreciated straightline to zero over the threeyear project life. The actual market value of these assets at the end of year 3 is expected to be $35,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 10 percent. What will the cash flows for this project be? (LG3)  1213   Project Cash Flows Mom's Cookies Inc. is considering the purchase of a new cookie oven. The original cost of the old oven was $30,000; it is now five years old, and it has a current market value of $13,333.33. The old oven is being depreciated over a 10year life toward a zero estimated salvage value on a straightline basis, resulting in a current book value of $15,000 and an annual depreciation expense of $3,000. The old oven can be used for six more years but has no market value after its depreciable life is over. Management is contemplating the purchase of a new oven whose cost is $25,000 and whose estimated salvage value is zero. Expected beforetax cash savings from the new oven are $4,000 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a fiveyear life, and the cost of capital is 10 percent. Assume a 40 percent tax rate. What will the cash flows for this project be? (LG5) 
