Practice_Prelim_2_Solutions

# Practice_Prelim_2_So - 1c 2a 3a 4a 5c 6b 7e 8e 9c 10 c Chapter 10 Question 15 Input area Initial investment Pretax salvage value Cost savings per

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1 c 2 a 3 a 4 a 5 c 6 b 7 e 8 e 9 c 10 c

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Chapter 10 Question 15 Input area: Initial investment \$1,200,000 Pretax salvage value \$125,000 Cost savings per year \$450,000 Cost savings per year \$400,000 Working capital reduction \$- Annual depreciation charge \$240,000 Aftertax salvage value \$81,250 Tax rate 35% Required return 18% *Depreciation straight-line over life 5 Output area: \$450,000 cost savings \$400,000 Year Cash flow Year 0 \$(1,200,000) 0 1 376,500 1 2 376,500 2 3 376,500 3 4 376,500 4 5 457,750 5 NPV \$12,895.01 Accept/Reject Accept Required pretax cost savings: NPV w/o OCF (\$1,164,484.88) Required OCF \$372,376.46 OCF less dep. tax shield \$288,376.46 Cost savings \$443,656.09
cost savings Cash flow \$(1,200,000) 344,000 344,000 344,000 344,000 425,250 \$(88,738.04) Reject

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Problem 2 Input Area: Old cost \$1,500,000 New machine cost \$3,000,000 Life of machine 5 Salvage value \$600,000 Old machine depreciation \$500,000 MV old machine \$1,200,000 Old machine value in 2 yrs \$400,000 Saved operating costs
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## This homework help was uploaded on 02/20/2009 for the course H ADM 225 taught by Professor Jwellman during the Fall '07 term at Cornell University (Engineering School).

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Practice_Prelim_2_So - 1c 2a 3a 4a 5c 6b 7e 8e 9c 10 c Chapter 10 Question 15 Input area Initial investment Pretax salvage value Cost savings per

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