The Lucent Corporation is considering investing in a new Aluminium sheet manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0.
The Aluminium sheet manufacturing machine will result in sales of 2,000 Aluminium sheets in year 1. Sales are estimated to grow by 10% per year each year through year three. The price per Aluminium sheet that Lucent will charge its customers is $18 each and is to remain constant. The Aluminium sheets have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Lucent Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 6% of its annual sales in accounts payable. The firm is in the 35% tax bracket, and has a cost of capital of 10%.
1)Find the depreciation tax shield for the Lucent Corporation's project in the first year
2)Find the amount of incremental income taxes that the Lucent Company will pay in the first year on this new project
Any suggestions on this. How to calcualte the depreciation tax shield and the incremental income taxes
The Aluminium sheet manufacturing machine will result in sales of 2,000 Aluminium sheets in year 1. Sales are estimated to grow by 10% per year each year through year three. The price per Aluminium sheet that Lucent will charge its customers is $18 each and is to remain constant. The Aluminium sheets have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Lucent Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 6% of its annual sales in accounts payable. The firm is in the 35% tax bracket, and has a cost of capital of 10%.
1)Find the depreciation tax shield for the Lucent Corporation's project in the first year
2)Find the amount of incremental income taxes that the Lucent Company will pay in the first year on this new project
Any suggestions on this. How to calcualte the depreciation tax shield and the incremental income taxes