chapter 11

# chapter 11 - Akbar Bhojani 105882655 Chapter 11 1 The...

This preview shows pages 1–4. Sign up to view the full content.

Akbar Bhojani 105882655 Chapter 11 1) The reason why the capital budgeting process focuses on cash flows and not  profits is because cash flow changes the value of the firm, cash outflows reduce  the value and cash inflows increase the value. 2) Sunk costs are cash flows that have already occurred or will occur regardless of  the decision to accept or reject the project. The reason why they don’t include the  sunk cost in their calculations is because the net present value or internal rate of  return will be distorted and inaccurate which could lead to a bad decision.  3)   4) Depreciation expense is a very valuable tool for businesses, if used correctly.  The reason why the depreciation expense is a part of the incremental cash flow  analysis because increases in the depreciation expense can increase a firms  cash flow, positively.  The greater the depreciation expense the greater the tax  benefit.  PROBLEM 11-6 Rhodes Manufacturing Corporation Given: Initial Cost of new Equipment \$375,000

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

View Full Document
End of year: 1 2 3 4 5 6 Earnings Before Depreciation and Taxes (EBDT) \$120,000 \$90,000 \$70,000 \$70,000 \$70,000 \$70,000 Discount rate 13% Tax rate 40% Year 1 2 3 4 5 6 MACRS depreciation percentages for five-year class 20.00% 32.00% 19.20% 11.50% 11.50% 5.80% life equipment Calculations: Incremental Cash Flows: Year 1 2 3 4 5 6 EBDT \$120,000 \$90,000 \$70,000 \$70,000 \$70,000 \$70,000 New depreciation expense 75,000 120,000 72,000 43,125 43,125 21,750 Change in Operating Income 45,000 (30,000) (2,000) 26,875 26,875 48,250 Income tax on new income 18,000 (12,000) (800) 10,750 10,750 19,300 Change in earnings after tax 27,000 (18,000) (1,200) 16,125 16,125 28,950 Add back depreciation 75,000 120,000 72,000 43,125 43,125 21,750 Net incremental operating cash flows \$102,000 \$102,000 \$70,800 \$59,250 \$59,250 \$50,700 Present value of cash flows \$90,265 \$79,881 \$49,068 \$36,339 \$32,159 \$24,352
Total present value of cash flows \$312,064 PROBLEM 11-7 Rhodes Manufacturing Corporation (with salvage value) Given: Initial Cost of new Equipment \$375,000 End of year: 1 2 3 4 5 Earnings Before Depreciation and Taxes (EBDT) \$120,000 \$90,000 \$70,000 \$70,000 \$70, Discount rate

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 13

chapter 11 - Akbar Bhojani 105882655 Chapter 11 1 The...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online