asseoch11

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\$ 2,600,00011-3Equipment’s 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.σNPV= [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]½= \$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 Rate×Basis = 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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