Use the following information for questions 15 and 16. North Haverbrook is follo

Question

Use the following information for questions 15 and 16. North Haverbrook is following the lead of Sydney and dismantling its failed monorail. The town has given the monorail to Langley Construction (LC). In exchange for receiving the monorail land for free, Langley Construction must bear all the costs of dismantling the monorail. LC had planned to simply turn the land into retail space. However, it is now evaluating a project to instead turn the monorail stations into a marginally more efficient of transportation via an as-needed pogo stick rental service. The pogo stick project has the following characteristics: .Dismantling the monorail stations is expected to cost $7 million this year. .Building the retail space will cost $3 million this year. . The pogo stick rental locations will cost the same as the retail space. However, the firm will need to spend $1 million acquiring pogo sticks. Retail space will be depreciated at prime cost over a useful life of 30 years. .Pogo sticks will be depreciated at prime cost over a useful life of 4 years. .At the end of year 3, the firm expects to sell its entire stock of pogo sticks for $300,000. The Pogo Stick project by itself is expected to generate $15,000,000 in pre- tax profits. When combined with the rest of LC's businesses, LC will generate $45,000,000 in pre-tax profits. . Tax rates for Langley Construction are given in the following table: Taxable Income ($) 0 to 10 million 10 to 25 million 25 to 50 million More than 50 million Tax Rate 25% $2.5 million + 30% of the amount over $10 million $7 million + 38% of the amount over $25 million $16.5 million + 40% of the amount over $50 million 15. What is the initial incremental capital expenditure of the pogo stick project? a. $4 million b. $1 million c. $7 million d. $11 million e. $3 million

Explanation / Answer

15. Initial incremental capital expenditure = $7 million + $ 3 million + $ 1 million = $11 million

answer = (d) = $ 11 million

16. the total pre tax profit for the company is $45 million (including $15 million of pogo stick project)

so company will be taxed at 38%

and all pogo stick are sold at $300000 at the end of year 3

so after tax salvage value is : $300000 (1-0.38)= $186000

answer is : (a) $186000

any doubts, feel free to ask. do not hurry in thumbs up or down

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