Please answer questions 3&4. Thanks project is accepted. clubs. The board of dir

Question

Please answer questions 3&4.
Thanks

project is accepted. clubs. The board of directors wants you to consice the introdu titanium bubble woods with graphite shafts. Which of the ioilowing costs are 3. Incremental Cash Flows Your company currently groduces and sel of a new line not relev a. Land you already own that will be used for the project, but otherwise will be s $700,000, its market value. b. A $300,000 drop in your sales of steel shaft clubs if the titanium woods with shafts are introduced. c. $200,000 spent on research and development last year on graphite shafts. 4. Depreciation Given the choice, would a firm prefer to use MACRS depreciation straight-line depreciation? Why?

Explanation / Answer

3)

Opportunity Cost: Opportunity cost is the benefit foregone when accepting one alternative over other. Land is relevant for decision because of opportunity cost.(i.e if it is not used in the project it can be sale out in the market .

A Sale of steel shaft is also relevant for decision because dropping sales of steel shaft if the titanic with graphic shafts are introduced.

A research & development cost incurred last year is irrelevant for decision because it is a sunk cost.

Sunk cost is a cost which is already incurred and cannot be recovered .

4)

Depreciation is a non-cash expense, but is tax deductible. Depreciation is deducted while calculating Net income but calculating operating cash outflow it is added an amount equal to the amount of depreciation Tax shield.

OCF=EBIT+Depreciation Taxes

Depreciation Tax shield=Depreciation*Tax

For tax purposes firm uses MACRS depreciation because it would provide largest depreciation in earlier years that cause lower tax payable on Income. Choice between MACRS and Straight line depreciation is only on the basis of time value issue., the total depreciation over the life is same but only difference is timing difference.    

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