- What is meant by leverage? (5 points)
The degree to which an investor or business is utilizing borrowed money. For example, if you decided to invest your $10,000 in real estate. You can purchase a 100,000 worth house by using your $10,000 plus $90,000 borrowed (loan) money. Think about the possible return/loss of your $10,000 if your house increase/decrease its value by 10% after 1 year..... - What usually happens when a person with a 72 month loan for the full price of a new car sells that car after 2 or 3 years? (5 points)
This person would take a capital loss. - In chapter 12, what is meant by a challenger and a defender? (5 points)
Defender: the previously implemented asset in a replacement analysis. Challenger: the best current available asset in a replacement analysis. - A prospective piece of equipment has the following marginal cost structure. Calculate (use shorthand notation) the EUAC for years 1 and 2 (10 points)
Year Total Marginal Cost - $17,750
- $ 15,200
EUAC or Year 1: 17750(P/F,i,1)(A/P,i,1) EUAC of Year 2: [17750(P/F,i,1) + 15200(P/F,i,20](A/P,i,2) - A person is in the 39.6% marginal federal income tax category and the marginal state income tax rate is 12%. What is their combined incremental tax rate? (10 points)
Combined incremental tax rate = marginal state income tax rate + marginal federal income tax rate x (1 - marginal state income tax rate) = 12% + 0.396(1-12%) = 46.8% - A company is considering purchasing a $10,000 computer system with an expected life of 5 years and zero salvage value. The company will save an estimated $3,000 per year for the five years. Assume straight-line depreciation. Calculate the after tax cash flow for years 0-5 with a marginal tax rate of 30%. (15 points)
Year | Before-Tax Cash flow(1) | Straight-line depreciation(2) | Taxable income(1)+(2) | 30% Income taxes | After-tax cash flow | 0 | -$10,000 | | | | -$10,000 | 1 | +$3,000 | -$2,000 | $1,000 | $300 | +$2,700 | 2 | +$3,000 | -$2,000 | $1,000 | $300 | +$2,700 | 3 | +$3,000 | -$2,000 | $1,000 | $300 | +$2,700 | 4 | +$3,000 | -$2,000 | $1,000 | $300 | +$2,700 | 5 | +$3,000 | -$2,000 | $1,000 | $300 | +$2,700 |
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