1. Assume the inflation rate is 4.17% and you invest $8,193.45 at a nominal interest rate of 9.63%. (Assume no additional deposits or withdrawals; also, assume no taxes.)
a. How much in nominal dollars would be in the account after 9 years?
b. How much in real dollars (current dollars) would be in the account after 9 years?
2. XYZ Company is considering a project that will increase the after-tax net accounting income 7 years from now by $4,729.38.
(It also will have effects on other years' income as well; however, this question only addresses what happens 7 years from now.) The depreciation for this project 7 years from now will be $15,360. Assume a marginal tax rate of 40% and a required rate of return of 12.50%. If we assume that the only thing causing cash flow to differ from accounting income is depreciation, then what is the net cash inflow 7 years from now resulting from this project?
3. If ABC Company builds a new factory, then 11 years from now ABC's depreciation will be $8,325.00 more than if no factory were built. For the same year, a colleague of yours determined that the net cash flow after taxes would be $2,462.92 more than if no factory were built. However, your colleague totally ignored the depreciation because she thought that depreciation is not a cash flow. ABC's marginal tax rate is 40.00% and the required rate of return on this factory is 9.50%. Determine ABC's net incremental cash inflow that would result 11 years from now as a result of building the factory.
4. DMJ, Inc., is considering a project of replacing several pieces of major machinery in its manufacturing process. If the machinery is replaced, then 6 years from now, DMJ's depreciation will increase by $3,520.00, and DMJ's Net Operating Cash Flow before taxes will increase by $4,733.38, and DMJ's taxes will increase by $490.00 (This tax increase does take into account the tax-effect of depreciation.). What will be the net incremental cash inflow 6 years from now, if this project is accepted? Assume a required rate of return of 10.20%.