# Calculating Depreciation

Please solve the following problems: 6- Calculating Depriciation – A piece of newly purchased industrial equipment costs \$1,375,000 and it is clasified as seven year property under MACRS. Calculate the annual depreciation allowances and end of the year book values for this equipment. 9- Calculating Project OCF – Quad Enterprises is considering a new three year expansion project that requires an initial fixed asset investment of \$2.32 million. The fixed asset will be depriciated straight line to zero over its 3 year tax life, after which time it will be worthless. The project is estimated to generate \$1.735 million in annual sales, with costs of \$650,000. If the tax rate is 21 percent, what is the OCF for this project? 10- Calculating Project NPV – in the previous problem, suppose the required return on the project is 21 percent. What is the project’s NPV? 11- Calculating Project Cash Flow from Assets – In the previous problem, supose the project requires an initial investment in net working capital of \$250,000, and the fixed asset will have a market value of \$180,000 at the end of the project. What is the project’s Year 0 net cash flow? Year 1? Year 2 and Year 3? What is the new NPV? 12- NPV and MACRS – In the previous problem, suppose the fixed asset actually falls into the 3 year MACRS class. All the other facts are the same. What is the project’s year 1 net cash flow? Year 2? Year 3? What is the new NPV? 24- Comparing Mutually Exclusive Projects – Suppose in the previous problem that the company always needs a conveyor belt system: when one wears out, it must be replaced. Which project should the firm choose now? (Problem 23 – Letang Industrial Systems Company is trying to decide between 2 different conveyor belt systems. System A costs @265,000, has a four year life, and requires \$73,000 in pretax annual operating costs. System B costs \$345,000, has a six year life and requires \$67,000 in pretax annual operating costs. Both systems are to be depriciated straight life to zero over their lives and will have zero salvage value. 7(page 377) – Calculating Break Even – In each of the following cases, calculate the accounting break even and the cash break even points. Ignore any tax effects in calculating the cash break even. Unit Price      Unit Variable Cost     Fixed Costs     Depriciation \$2,980           \$2,135                        \$8,100,000      \$3,100,000 \$     46           \$    41                         \$   185,000      \$   183,000 \$       9           \$      3                         \$       2,770      \$       1,050 11(Page 377) – Calculating Operating Leverage – At an output level of 45,000 units, you calculate  that the degree of operating leverage is 2.79. If output rises to 48,000 units, what will the percentage change in operating cash flow be? Will the new level of operating leverage be higher or lower? Explain 24(Page 379) – Break Even Analysis – In an effort to capture the large jet mark, Airbus invested \$13 billion developing its A380, which is capable of carrying 800 passanger. The plane had a list price of \$280 million. In discussing the plane, Airbus stated that the company would break even when 249 A380s were sold. a- Assuming the break even sales figure given is the accounting break even, what is the cash flow per plane? b- Airbus promised its shareholders a 20 percent rate of return on the investment. If sales of the plane continue in perpetuity, how many planes must the company sell per year to deliver on this promise? c- Suppose instead that the sales of the A380 last for only 10 years. How many planes must Airbus sell per year to deliver the same rate of return?

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