Final_ISE460_F07_sol

Final_ISE460_F07_sol - ISE 460 FINAL Problem No 1 One would...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
ISE 460 Fall 2007 FINAL 12/13/07 Problem No. 1 One would not invest as the NPV is negative 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 B C D E F G Cost Basis $200,000 Type 3 Year MACRS Income Tax rate 15% Interest on borrowed funds = 10.0% MARR 10.0% General inflation rate = 5% Year 0 1 2 3 Income Statement Inflation rate Revenues: 110,000 $ 140,000 $ 95,000 $ Expenses 5% 42,000 $ 44,100 $ 46,305 $ Depreciation 66,667 $ 88,889 $ 14,815 $ Debt Interest 4,000 $ 2,792 $ 1,462 $ Taxable Income (2,667) $ 4,220 $ 32,418 $ Income taxes (400) $ 633 $ 4,863 $ Net Income (2,267) $ 3,587 $ 27,555 $ Cash Flow Statement Operating Activities Net Income (2,267) $ 3,587 $ 27,555 $ Depreciation 66,667 $ 88,889 $ 14,815 $ Investment Activities Investment ($200,000) Salvage 40,000 $ Gains Tax ($1,556) Financing activities Borrowed funds 40,000 Principal Repayment ($12,085) ($13,293) ($14,622) Net Cash Flow (Actual $) ($160,000) $52,315 $79,182 $66,192 Book Value $133,333 $44,444 $29,630 Loan Payment $16,084.59 Balance 40,000 27,915 14,622 0 PW (actual $) $2,731 1
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
ISE 460 Fall 2007 FINAL 12/13/07 Problem No. 2 a) If there was no borrowing, the inflation tax would have been the difference between the NPV of the inflation case and the non-inflation case. However borrowing makes inflation attractive, therefore the inflation tax is actually a gain of $81,714 - $45,555 = $36,159.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern