Emily Home Catering (EHC) is considering switching from its old food

maker to a new Wonder Food Maker. Both food makers will remain useful

for the next 10 years, but the new food maker will generate a depreciation

expense of $5,000 per year, while the old food maker will generate a

depreciation expense of $4,000 per year. What is the after-tax cash flow

effect from deprecation of switching to the new food maker for EHC if the

company’s tax rate is 30 percent and the correct discount rate is 12

percent?

You purchased 100 shares in an oil company, Vic Energy Ltd at the

price of $50/share. The company has 1 million shares outstanding. Ten

days later Vic Energy announced an investment in an oil field in east

Victoria. The probability that the investment will be successful and

generate an NPV of $10 million is 0.2; the probability that the

investment will be a failure and generate a negative NPV of negative $1

million is 0.8. How would you expect the share price to change upon

the company’s announcement of the investment?

Alan’s Fine Furniture creates custom bed frames. Fixed cash

expenditures are expected to be $120,000, the projected EBIT for the

project is $130,000, and the Accounting DOL will be 2.5. What is the

depreciation and amortisation for the company as well as Cash Flow

DOL?

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