4. A project with fixed costs
4. A project with fixed costs of 320,000 and operating cash flowof 160,000 was expected to sell 11,000 units. The finalresults for the year were that 9,800 units were sold instead.
What is the degree of operating leverage? __________________
What is the percentage change in quantity? _________________
What is the percentage change in operating cash flow?________________
What would the operating cash flow be under the actual level ofproduction? __________________
7. Colby is in the furniture movingbusiness. He has some equipment that he purchased newtwo years ago for $6,000. At the time, Colby’saccountant told him to depreciate it straight line over threeyears. Now there is better equipment out there and hewants to get rid of his old machine, but he can get only $700 forit. Colby is in the 35% tax bracket.
What is the book value of the old machine? __________
What is the market value of the old machine? _________
Will Colby have a gain or loss? _____________
How much will his gain or loss be? ____________
What will be the tax effect (amount)? ____________
What is the after tax salvage value of the old machine?_______________
8. A certain asset was purchased at a cost of$1,140,000. This company is in the 35% taxbracket. Complete the lines below:
Year MACRS% Amount ofDep Amount ofDep Difference TaxEffect
underMACRS understraight line
1 .3333 ______________ ________________
2 .4444 ______________ ________________ ______________ ______________
3 .1482 ______________ ________________
4 .0741 ______________
9. Frugal Company is considering two machines forpurchase. The machine is integral to their business, sowhen it wears out, it will be replaced with a similarmachine. The company uses a discount rate of 9% fortheir investments. Compute the equivalent annual cost ofeach machine.
MachineA MachineB
Initialcost 219,000 188,000
UsefulLife 14years 13years
Annualmaintenance 1,500peryear 2,000per year
EAC of A _____________ EAC of B______________ Which should Frugal choose?______________
Aor B
Answer:
4. Operating leverage= Contribution/(Contribution-FixedCost)=4,80,000/(4,80,000-3,20,000)=3 times
Percentage change in quantity=(11,000-9,800)/11,000=0.1091 or10.91%
Percentage change in operating cashflow=(1,60,000-1,07,636)/1,60,000=0.3273 or 32.73%
Operating cash flow for 9,800units=4,80,000*9,800/11,000-3,20,000=$1,07,636
7. Book value of old machine= 6,000(1-2/3)=$2,000
Market value of old machine= $700
Colby will have a loss since market value isless than book value.
Capital loss=$(2,000-700)=$1,300
Tax savings on capital loss=$1,300*35%=$455
After tax salvage value of old machine= $(700+455)=$1,155
8. Because of not having knowledge about MACRS system ofdepreciation I am unable to answer this question.
9. For Machine A, annual maintenance=$1,500 per year havinguseful life of 14 years
Initial investment=$2,19,000
PVAF(9%.14)=7.7862
Equivalent initial investment=$2,19,000/7.7862=$28,126.69
EAC of A= $(1,500+28,126.69)=$29,626.69
For Machine B, annual maintenance=$2,000 per year having usefullife of 13 years
Initial investment=$1,88,000
PVAF(9%.13)=7.4869
Equivalent initial investment=$1,88,000/7.4869=$25,110.53
EAC of B= $(2,000+25,110.53)=$27,110.53
Thus Frugal should choose Machine B.
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