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Practice_Prelim_2_Solutions

Practice_Prelim_2_Solutions - 1c 2a 3a 4a 5c 6b 7e 8e 9c 10...

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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
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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 $275,000 Discount rate 15% Tax rate 35% Output Area: a. New kiln: Year 0 1 Ending book value $3,000,000 $2,400,000 Cost savings $178,750 Depreciation $210,000 Operating CF $388,750 Change in NWC 0 0 Capital spending $(3,000,000) 0 Total cash flow $(3,000,000) $388,750 Net present value $(1,502,950.78) EAC $(448,353.59) Old Kiln: Year 0 1 Ending book value $1,000,000 Depreciation tax shield $175,000
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