asseoch11 - 11-1Equipment$ 9,000,000NOWC...

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Unformatted text preview: 11-1Equipment$ 9,000,000NOWC Investment3,000,000Initial investment outlay$12,000,00011-2Operating Cash Flows: t = 1Sales revenues$10,000,000Operating costs7,000,000Depreciation2,000,000Operating income before taxes$ 1,000,000Taxes (40%)400,000Operating income after taxes$ 600,000Add back depreciation2,000,000Operating cash flow$ 2,600,00011-3Equipments original cost$20,000,000Depreciation (80%)16,000,000Book value$ 4,000,000Gain on sale = $5,000,000 - $4,000,000 = $1,000,000.Tax on gain = $1,000,000(0.4) = $400,000.AT net salvage value = $5,000,000 - $400,000 = $4,600,000.11-4E(NPV) = 0.05(-$70) + 0.20(-$25) + 0.50($12) + 0.20($20) + 0.05($30)= -$3.5 + -$5.0 + $6.0 + $4.0 + $1.5= $3.0 million.NPV= [0.05(-$70 - $3)2+ 0.20(-$25 - $3)2+ 0.50($12 - $3)2+ 0.20($20 - $3)2+ 0.05($30 - $3)2]= $23.622 million..874.7.3$622.23$CV==Chapter 11Cash Flow Estimation and Risk AnalysisSOLUTIONS TO END-OF-CHAPTER PROBLEMS11-111-5a. 0 1 2 3 4 5Initial investment ($250,000)Net oper. WC (25,000)Cost savings $ 90,000 $ 90,000 $ 90,000 $ 90,000 $ 90,000Depreciation 82,500112,50037,50017,500Oper. inc. before taxes $ 7,500 ($ 22,500) $ 52,500 $ 72,500 $ 90,000Taxes (40%) 3,000(9,000) 21,00029,00036,000Oper. Inc. (AT) $ 4,500 ($ 13,500) $ 31,500 $ 43,500 $ 54,000Add: Depreciation 82,500112,50037,50017,500Oper. CF $ 87,000 $ 99,000 $ 69,000 $ 61,000 $ 54,000Return of NOWC $25,000Sale of Machine 23,000Tax on sale (40%) (9,200)Net cash flow ($275,000) $ 87,000$ 99,000$ 69,000$ 61,000$ 92,800NPV= $37,035.13Notes:aDepreciation Schedule, Basis = $250,000MACRS RateBasis = YearBeg. Bk. ValueMACRS RateDepreciationEnding BV1$250,0000.33$ 82,500$167,5002167,5000.45112,50055,000355,0000.1537,50017,500417,5000.0717,500$250,000b. If savings increase by 20 percent, then savings will be (1.2)($90,000)= $108,000.If savings decrease by 20 percent, then savings will be (0.8)($90,000)= $72,000.(1)Savings increase by 20%:0 1 2 3 4 5 Initial investment ($250,000)Net oper. WC (25,000)Cost savings $108,000 $108,000 $108,000 $108,000 $108,000Depreciation 82,500112,50037,50017,500Oper. inc. before taxes $ 25,500 ($ 4,500) $ 70,500 $ 90,500 $108,000Taxes (40%) 10,200(1,800) 28,20036,20043,200Oper. Inc. (AT) $ 15,300 ($ 2,700) $ 42,300 $ 54,300 $ 64,800Add: Depreciation 82,500112,50037,50017,500Oper. CF $ 97,800 $109,800 $ 79,800 $ 71,800 $ 64,800Return of NOWC $25,000Sale of Machine 23,000Tax on sale (40%) (9,200)Net cash flow ($275,000) $ 97,800$109,800$ 79,800$ 71,800$103,600NPV = $77,975.632(2)Savings decrease by 20%:0 1 2 3 4 5 Initial investment ($250,000)Net oper. WC (25,000)Cost savings $ 72,000 $ 72,000 $ 72,000 $ 72,000 $ 72,000Depreciation 82,500112,50037,50017,500Oper. inc. before taxes ($ 10,500)($ 40,500) $ 34,500 $ 54,500 $ 72,000Taxes (40%) (4,200) (16,200) 13,80021,80028,800Oper. Inc. (AT) ($ 6,300)($ 24,300) $ 20,700 $ 32,700 $ 43,200Add: Depreciation 82,500112,50037,50017,500Oper. CF $ 76,200 $ 88,200 $ 58,200 $ 50,200 $ 43,200Return of NOWC $25,000Sale of Machine 23,000...
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asseoch11 - 11-1Equipment$ 9,000,000NOWC...

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