ch 10 solution

# ch 10 solution - 1 The \$5 million acquisition cost of the...

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1. The \$5 million acquisition cost of the land six years ago is a sunk cost. The \$5.3 million current aftertax value of the land is an opportunity cost if the land is used rather than sold off. The \$11.6 million cash outlay and \$425,000 grading expenses are the initial fixed asset investments needed to get the project going. Therefore, the proper year zero cash flow to use in evaluating this project is \$5,300,000 + 11,600,000 + 425,000 = \$17,325,000 2. Sales due solely to the new product line are: 19,000(\$12,000) = \$228,000,000 Increased sales of the motor home line occur because of the new product line introduction; thus: 4,500(\$45,000) = \$202,500,000 in new sales is relevant. Erosion of luxury motor coach sales is also due to the new mid-size campers; thus: 900(\$85,000) = \$76,500,000 loss in sales is relevant. The net sales figure to use in evaluating the new line is thus: \$228,000,000 + 202,500,000 – 76,500,000 = \$354,000,000 4. To find the OCF, we need to complete the income statement as follows: Sales \$ 876,400 Costs 547,300 Depreciation 128,000 EBT \$ 201,100 [email protected]% 68,374 Net income \$ 132,726 The OCF for the company is: OCF = EBIT + Depreciation – Taxes OCF = \$201,100 + 128,000 – 68,374 OCF = \$260,726 The depreciation tax shield is the depreciation times the tax rate, so: Depreciation tax shield = t c Depreciation Depreciation tax shield = .34(\$128,000) Depreciation tax shield = \$43,520 The depreciation tax shield shows us the increase in OCF by being able to expense depreciation. 5.

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ch 10 solution - 1 The \$5 million acquisition cost of the...

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