06%20relevant%20cash%20flows%20and%20NPV%20analysis%20-%20lecture%20problems%20solutions

06%20relevant%20cash%20flows%20and%20NPV%20analysis%20-%20lecture%20problems%20solutions

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Unformatted text preview: Lecture problems – relevant cash flows and NPV analysis In year 1, what net income should Northeast Bottlers use in its analysis of the Boston project, which involves expanding into Boston, if depreciation would be $100,000; expenses would be $200,000; revenues would be $400,000; interest payments would be $50,000; and the tax rate would be 40%? Year 1 Revenues 400,000 Costs 200,000 Annual depreciation 100,000 EBIT = rev – costs – depreciation 100,000 Tax rate 0.40 Taxes = EBIT × tax rate 40,000 Net inc = EBIT – taxes 60,000 Net income of project for project analysis = Taxable income – Taxes Taxable income = EBIT, since all interest payments are ignored Taxes = Tax rate × Taxable income EBIT = Sales − Costs – Depreciation EBIT = $400,000 – $200,000 – $100,000 = $100,000 = taxable income Taxes = 40% × $100,000 = $40,000 Net income = $100,000 – $40,000 = $60,000 1 Lecture problems – relevant cash flows and NPV analysis In year 1, what expenses should Northeast Bottlers use in its analysis of the Boston project, which involves expanding into Boston, if today is time 0 and expenses from lease payments, electricity, wages, raw materials, etc., but not any marketing costs would be $200,000 from bottling in Boston; and in addition, marketing costs of $20,000 per division would be allocated evenly to the company’s 3 divisions (Philly, New York, and Boston) if the project is pursued and marketing costs of $25,000 per division would be allocated evenly to the company’s 2 divisions (Philly and New York) if the project is not pursued? Relevant expenses for Boston project = incremental expenses for Boston project = costs in Boston + incremental marketing costs Costs in Boston = $200,000 Incremental marketing costs Marketing costs = 3 × $20,000 = $60,000 with Boston Marketing costs = 2 × $25,000 = $50,000 without Boston Incremental marketing costs with Boston = total marketing costs with project – total marketing costs without project = $60,000 – $50,000 = $10,000 Relevant expenses for Boston project = $200,000 + $10,000 = $210,000 2 Lecture problems – relevant cash flows and NPV analysis In year 1, what expenses should Northeast Bottlers use in its analysis of the Boston project, which involves expanding into Boston if today is time 0 and variable expenses from lease payments, electricity, wages, raw materials, etc. would be $200,000 from bottling in Boston and the only fixed expense in 1 year involves payments from a contract for plant design in Boston signed by Northeast yesterday to pay Wicked Consulting $10,000 in 1 year Relevant expenses for Boston project = incremental expenses for Boston project = incremental variable costs for Boston project + incremental fixed costs for project Incremental variable costs for project = $200,000 Incremental fixed costs for project Fixed costs in 1 year to firm if project pursued = $10,000 Fixed costs in 1 year to firm if project not pursued = $10,000 Incremental fixed costs with Boston...
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This note was uploaded on 02/03/2011 for the course FINANCE 301 taught by Professor Murray during the Spring '09 term at George Mason.

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06%20relevant%20cash%20flows%20and%20NPV%20analysis%20-%20lecture%20problems%20solutions

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