Year |
0 |
1 |
2 |
3 |
Sales (Revenues) |
100,000 |
100,000 |
100,000 |
|
- Cost of Goods Sold (50% of Sales) |
50,000 |
50,000 |
50,000 |
|
- Depreciation |
30,000 |
30,000 |
30,000 |
|
= EBIT |
20,000 |
20,000 |
20,000 |
|
- Taxes (35%) |
7000 |
7000 |
7000 |
|
= unlevered net income |
13,000 |
13,000 |
13,000 |
|
+ Depreciation |
30,000 |
30,000 |
30,000 |
|
+ changes to working capital |
-5000 |
-5000 |
10,000 |
|
- capital expenditures |
-90,000 |
Answer 1
MACRS is used for the computation of deduction of tax in respect of depreciation for those assets on which depreciation is charged. In terms of degree of deduction it is found that greater deduction is done in the earlier years while smaller in the latter period.
MACRS = Cost ˣ 1Useful life ˣ A ˣ Depreciation convention
In the 2nd year the formula is
MACRS = (Cost – previous year depreciation) ˣ 1Useful life ˣ A
Where A = 100% or 150% or 200%
There are three conventions of depreciations. These are mid-month, mid-quarter, half-year conventions.
Depreciation to be charged either adopting 150% declining balance or 200% declining balance or straight method.
In the given problem life time of the asset is 3 years. It is assumed that half year convention to be applied and the two other conventions are not relevant as it is further assumed that the firm has started its operation mid of the year.
Depreciation at the end of the first year is
$90000 ˣ1/3 ˣ200% declining balance ˣ ½ half year convention
= $90000 ˣ33.33% ( Using the three year convention table relating to 200% declining
balance)
= $30000
Next year depreciation amount
(Cost – previous year depreciation) ˣ ˣ A
=($90000 - $30000)ˣ1/3 ˣ A [A = 200% declining method]
= $60000ˣ44.45%
= $26670
3rd year in the same manner the amount of depreciation is
($90000 - $30000 - $26670) ˣ14.81%
= $4936
While in case of the firm the rule of either 200% DB method or 150% DB method are used that says greater deduction in the earlier period and smaller latter period.
Here every year depreciation is taken $30000
It means here GDS using straight line method is used where equal yearly deduction is made.
Answer 2
EBITDA stands for earnings before interest tax depreciation and amortisation
Here in this problem
EBITDA = Net income +tax+ depreciation ( No interest data and amortisation found)
1st year EBITDA = $13000 + $7000 + $30000 = $50000
There is no change in the 2nd year and 3rd year data so
2nd year EBITDA = $13000 + $7000 + $30000 = $50000
3rd year EBITDA = $13000 + $7000 + $30000 = $50000
Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on us...
uul liaie h the exam paper and each of your answer sheets. Epiphany Industries is considering a new capital budgeting project that will last for three I. (10 pts.) years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projections: Year Sales (Revenues) 100,000 100,000 100,000 50,000 50,000 50,000 30,000 30,000 30,000 20,000 20,000 20,000 Cost of Goods Sold (50% of Sales) -Depreciation...
Sensys AB is considering a new capital budgeting project that will last for three years. Sensys plans on using a cost of capital of 3% to evaluate this project. Sensys has also capital expenditures of 90,000 which will be depreciated straight-line over 3 years. Based on extensive research, it has prepared the following incremental cash flow projections: Year 0 1 2 3 Sales (Revenues) 100,000 100,000 100,000 - Cost of Goods Sold (50% of Sales) 50,000 50,000 50,000 - Depreciation...
lazy snake industries is considering a new capital budgeting project that will last for three years. lazy snake plans on using a cost of capital of 12% to evaluate this project. analysis department has prepared the following incremental cash flow projections: year 0 1 2 3 Sales (revenues) 150000 165000 180000 -Cost of goods sold (50% of sales) 75000 82500 90000 -Depreciation 30000 30000 30000 =EBIT 45000 52500 60000 -Taxes (35%) 15750 18375 21000 =Unlevered net income 29250 34125 39000...
Buena Vista Industries is considering investing in a new project that will last for three years. The project requires capital expenditures of $75,000 that will be depreciated over three years. In addition, working capital will need to increase by $5,000 in the first year and maintain that level until the end of the project's life, at which point working capital will drop by $5,000. Buena Vista plans on using a cost of capital of 12% to evaluate this project. Based...
1.Epiphany Industries is considering a new capital budgeting project that will last for two years. The revenue for the first year is 200,000 and revenues grow at an annual rate of 10%. The cost of goods sold is 50% of the revenue. The capital expenditure is 120,000. The tax rate is 35%. Epiphany plans on using a cost of capital of 12% to evaluate this project. The depreciation is straight-line depreciation. Please fill in the following blanks: 15 points (3...
3. Capital Budgeting. (15 points) Ephemeral Industries is considering a new capital budgeting project that will last for three years. Ephemeral plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following information. The project is expected to produce $170,000 in new sales for the 3 operating years. Cost of Goods sold is 50% of revenues. The project entails the purchase of a capital asset for $90,000 that will...
3. Capital Budgeting. (15 points) Ephemeral Industries is considering a new capital budgeting project that will last for three years. Ephemeral plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following information. The project is expected to produce $170,000 in new sales for the 3 operating years. Cost of Goods sold is 50% of revenues. The project entails the purchase of a capital asset for $90,000 that will...
26) CathFoods will release C-4 a new range of candies which contain antioxidants. New equipment to manufacture the candy will cost $5 million, which will be depreciated by straight- line depreciation over four years. In addition, there will be $5 million spent on promoting the new expected that the range of candies will bring in revenues of S7 million per year for four years w production and support costs the incremental free cash flows in the second year of this...
Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $800,000 of equipment. She is unsure what depreciation method to use in her analysis, straight-line or the 3-year MACRS accelerated method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life (ignore the half-year convention for the straight-line method). The applicable MACRS depreciation rates are 33%, 45%, 15%, and 7%, as discussed in Appendix 12A. The company’s WACC...
Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $575,000 of equipment. She is unsure what depreciation method to use in her analysis, straight-line or the 3-year MACRS accelerated method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life (ignore the half-year convention for the straight-line method). The applicable MACRS depreciation rates are 33%, 45%, 15%, and 7%. The company's WACC is 12%, and its tax...