MIME 310 - Tutorial Solutions 6

# MIME 310 - Tutorial Solutions 6 - McGill Faculty of...

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1 McGill Faculty of Engineering MIME 310 Engineering Economy Tutorials Chapter 6. Project Evaluation Techniques

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2 McGill Faculty of Engineering MIME 310 Engineering Economy Tutorials 6.1 Given the following items from the financial records of a company, determine the before- and after-tax cash flow. Income Statement (‘000\$) * Assume non taxable - Depreciation allowance 160 - Other non-cash tax allowances 80 = Taxable income 460 - Corporate income taxes 200 + Proceeds from the disposal of fixed assets 30 = Net income 290 '000 \$ Sales and other revenue 2500 Capital expenditures 250 Corporate income taxes 200 Depreciation allowance 160 Other non-cash tax allowances 80 Operating and administrative costs 1800 Dividends declared and paid 20 Proceeds from the disposal of fixed assets 30 * Sales and other revenue 2500 - Operating and administrative costs 1800 = Earnings before depreciation and taxes 700
3 McGill Faculty of Engineering MIME 310 Engineering Economy Tutorials B-T Cash Flow: Earnings before depreciation and taxes - Capital expenditures + Proceeds from disposals 700 - 250 + 30 = 480 A-T Cash Flow: B-T Cash Flow - Taxes 480 - 200 = 280 Alternatively, A-T Cash Flow: Net income + Non-cash tax allowances - Capital expenditures 290 + (160 + 80) - 250 = 280 B-T Cash Flow: A-T CF + Taxes 280 + 200 = 480

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4 McGill Faculty of Engineering MIME 310 Engineering Economy Tutorials 6.2 Given the following cash flow components, determine the after-tax time distribution of cash flows and associated payback period. Payback Period: 5 + [(2800 - 2000) / 950] - 2 = 3.8 years or 6 - [(2950 - 2800) / 950] - 2 = 3.8 Cash Flow: Revenue - Operating Expenses - Taxes - Capital Expenditures Initial Investment : 800 + 1500 + 500 = 2800 Cumulative Production Period Cash Flows Year 3 500 (lower) 4 500 + 500 = 1000 (lower) 5 1000 + 1000 = 2000 (lower) 6 2000 + 950 = 2950 (higher) Cash Flow (‘000 \$) -800 -1500 -500 500 500 1000 950 900 300 Year Revenues (‘000 \$) Operating Expenses (‘000 \$) Taxes (‘000 \$) Capital Expenditures (‘000 \$) Time 0 - - - 800 1 - - 0 1500 2 - - 0 500 3 2500 2000 0 0 4 3000 2200 300 0 5 4000 2500 500 0 6 4000 2500 550 0 7 4000 2500 600 0 8 3000 2200 500 0
5 McGill Faculty of Engineering MIME 310 Engineering Economy Tutorials Determine the discounted payback period using a discount rate of 10%. no discounted payback period, i.e. initial investment cannot be recovered. Initial Discounted Investment : 800 + 1364 + 413 = 2577 Cumulative Discounted Production Period Cash Flows Year 3 376 (lower) 4 376 + 342 = 718 (lower) 5 718 + 621 = 1339 (lower) 6 1339 + 536 = 1875 (lower) 7 1875 + 462 = 2337 (lower) 8 2337 + 140 = 2477 (lower) DCF @ 10% (‘000 \$) -800 -1364 -413 376 342 621 536 462 140 Year Revenues (‘000 \$) Operating Expenses (‘000 \$) Taxes (‘000 \$) Capital Expenditures (‘000 \$) Time 0 - - - 800 1 - - 0 1500 2 - - 0 500 3 2500 2000 0 0 4 3000 2200 300 0 5 4000 2500 500 0 6 4000 2500 550 0 7 4000 2500 600 0 8 3000 2200 500 0

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MIME 310 - Tutorial Solutions 6 - McGill Faculty of...

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