106) The annual income statement of ZAP Inc. shows the following items:

Sales$800,000

Total expenses (excluding amortization)$560,000

Amortization$160,000

Average income tax rate20 percent

Capital Cost Allowance$140,000

Required:

Compute the following amounts (ignore present value considerations):

a.Net after-tax accounting income

b.Total net after-tax cash inflow from operations

107) The owner of a construction company is contemplating possible purchase of new equipment. The equipment would cost $40,000, have an expected life of 8 years and a zero terminal salvage value. The equipment is Class 8 (20% declining balance).

The equipment would generate $125,000 of additional annual revenue, but yearly expenses for additional labour and material would also increase by $115,000.

Assume the appropriate tax rate is 20 percent. The required after-tax rate of return is 14 percent.

The following data are for an interest rate of 14 percent and 8 periods.

Present value of $10.3506

Future value of $12.8526

Present value of annuity of $14.6389

Future value of annuity of $113.2328

Required: Compute the net present value of the investment. Should the equipment be purchased?



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