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Q1:

The following is information retrieved from the Salvia Company data:

-The income tax rate is 40% of operating income each year.

-The before-tax additional operating cash inflows from Hybrid bus are $240,000 in year 1- 4 and $210,000 in year 5 in addition to $30,000 of working capital will be recovered.

-For tax purposes, Salvia uses the straight-line depreciation method and assumes there is no terminal disposal value of the bus.

-Gain or losses on the sale of depreciable assets are taxed at the same rate as ordinary income.

-The tax effects of cash inflows and outflows occur at the same time that the cash inflows and outflows occur.

-Salvia uses an 8% required rate of return for discounting after-tax cash flows.

-The date for the buses as follow:

	Old Bus	New Hybrid Bus
Purchase price Current book value Current disposal value Terminal disposal value five years from now Annual depreciation Working capital	- $60,000 28,500 0 ? 6,000	$660,000 - Not applicable 0 ? 36,000

Required:

Assume that Salvia is subject to income tax at 40% rate and the company uses the NPV method. Should the management of the company accept the investment in new hybrid bus? Show your calculation by preparing Excel sheet with formatting all the cells.

Q2:

Nikola Inc. is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $5,000,000 for the year. Lori Bart, staff analyst at Nikola Inc., is preparing an analysis of the two projects under consideration by the companys owner.

Potato Supreme predicts the following cash flows from operation, net of income taxes (in thousands) for each customer account for the next 5 years:

	Project A	Project B
Project cash outflow: Net initial investment Project cash inflows: Year 1 Year 2 Year 3 Year 4 Required rate of return	$3,000,000 $1,000,000 1,000,000 1,000,000 1,000,000 10%	$1,500,000 $400,000 900,000 900,000 10%

Required:

Calculate the payback period for each of the two project. Using the discounted payback method.

Show your calculation by preparing Excel sheet with formatting all the cells

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