Managerial Finance FN5201

Home assignment #1
Date: 28/01/2009

Problem # 2
Testing equipment Machine
Year Depreciation NBV Depreciation NBV
cost cost
0 28,000 53,000
1 $9,333 18,667 $10,600.00 42,400.00
2 $12,445 6,222 $16,960.00 25,440.00
3 $4,148 2,074 $10,176.00 15,264.00
4 $2,074 0.00 $6,105.60 9,158.40
5 $6,105.60 3,052.80
6 $3,052.80 0.00

Solution:

Testing equipment Machine

0.5x2x(1/3)x$28,000 = $9,333
2х(1/3)х$18,667 = $12,445
$6,222/1.5 years = $4,148
$6,222/1.5 years x 0.5 = $2,074
0.5x2x(1/5)x$53,000 = $10,600.00
2х(1/5)х$42,400 = $16,960.00
2х(1/5)х$25,440 = $10,176.00
$15,264/2.5 years = $6,105.60
$15,264/2.5 years = $6,105.60
$15,264/2.5 years x 0.5 = $3,052.80

Problem # 3
Interest Income = 1,500,000x0.12 = $180,000
Dividend Income = 3x100,000x0.30=$90,000

Income Tax at marginal rate 34%

Tax on interest income = 180,000x0.34
= $61,200
Total taxes = $91,800
Tax on dividend income = 90,000x0.34
= $30,600

Problem # 4

Year 2001 2002 2003 2004 2005

Taxable Income $0 $35,000 $68,000 ($120,000) $52,000
Tax $0 $5,250 $12,000 $0 $8,000
Carryback/forward $0 ($35,000 ($68,000 $0 ($17,000)
) )
Taxable Income after $0 $0 $0 $0 $35,000
carryback/forward
Tax Refund $0 $5,250 $12,000 $0 $2,750
Income tax $0 $0 $0 $0 $5,250

Problem # 5
a) Real rate of return is 5%, inflation premium is 4%
b) If the inflation rate will be 2%, the lender will gain as his real rate of return will be
7%, not expected 5%. The borrower will suffer as he should pay at higher than
expected rate.
c) If the inflation rate will be 6%, the lender will suffer as his real rate of return will
be 3%, not expected 5% and the borrower will gain.