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2 years ago

8

Joshua Industries is considering a new project with cash inflows of $478,000 for the indefinite future. Cash costs are 68 percen

t of the cash inflows. The initial cost of the investment is $685,000. The tax rate is 34 percent and the unlevered cost of equity is 14.2 percent. The firm is financing $200,000 of the project cost with debt. What is the adjusted present value of the project?

1 answer:

Alex2 years ago

4 0

Answer:

$93,940.85

Explanation:

Adjusted present value is the sum of net present value of after tax cash flow and net present value of tax shield.

First compute after tax cash flow:

Cash inflow = $478,000

Cash cost = 68% of $478,000 = $325,040

Pre-tax profit = 478,000 - 325,040 = $152,960

Tax = 34 %

After tax cash flow = 152,960 (1 - 0.34) = $100,953.60

Net present value of after tax cash flow = $\frac{After\ tax\ cash\ flow }{Cost\ of\ equity} -Intial\ investment\\$

= $\frac{100,953.60}{0.142} - 685,000$

= $25,940.85

Present value of tax shield = Amount of debt × tax rate

= 200,000 × 0.34

= $68,000

Adjusted present value = 28,940.85 + 68,000

= $93,940.85

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2 years ago

Say that Alland can produce 32 units of food per person per year or 16 units of clothing per person per year, but Georgeland can

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Answer:

Georgeland has an absolute but not a comparative advantage in producing clothing.

Explanation:

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Comparative advantage is the ability of a firm to produce goods at a lower opportunity cost. Therefore they are able to sell at lower price compared to competitors.

Georgeland can produce 18 units of clothe per year while Alland can produce 16 units per year, so Georgeland has absolute advantage.

In producing clothes Georgeland has opportunity cost of 36 units of food which is higher than that of Alland which is 32 units of food. So Georgeland does not have comparative advantage in producing clothes.

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2 years ago

Suppose you have $10,000 in your checking account. You withdraw $500 cash from your account and hide it under your pillow for fu

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2 years ago

The Nelson Company has $1,750,000 in current assets and $700,000 in current liabilities. Its initial inventory level is $490,000

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Answer:

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Explanation:

Current assets = $1,750,000

Current liabilities = $700,000

Initial inventory level = $490,000

Current ratio = Current assets ÷ Current liabilities

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1.9 = (Current assets + $\Delta{NP$ ) ÷ (Current liabilities + $\Delta{NP$ )

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Answer:

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