109) Tex Corporation trades in a class 10 (30%) asset during the current year. The opening UCC balance in the class 10 pool is $420,000. Tex trades in an asset for $25,000, which he sets off the $125,000 he pays for a new class 10 asset. The tax marginal rate is 35%. The nominal after-tax rate of return is 10%.

a.Calculate the UCC balance at the end of the year.

b.Calculate the tax shield on the trade in.

c.Calculate the NPV cash outflow on the trade in.

110) The Chevette Company has come to you for help in establishing a minimum desired rate of return to use in the evaluation of a capital project with a 5-year life.

The following data have been provided:

Inflation rate for past 5 years6.0 percent

Expected inflation rate for next 5 years4.5 percent

“Risk-free” element4.0 percent

“Risk” premium demanded for this project5.0 percent

Required:

a.What would be an appropriate minimum desired rate of return?

b.What is meant by “risk-free” element?

c.What is meant by “risk” premium?

d.Why is an inflation factor relevant?



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