Chapter12Solutions

# Chapter12Solutions - Chapter 12 Problem Solutions 12-1 a...

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Unformatted text preview: Chapter 12 Problem Solutions 12-1 a. Equipment \$ 9,000,000 NOWC Investment 3,000,000 Initial investment outlay \$12,000,000 b. No, last year’s \$50,000 expenditure is considered a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis. c. The potential sale of the building represents an opportunity cost of conducting the project in that building. Therefore, the possible after-tax sale price must be charged against the project as a cost. 12-2 a. Operating cash flows: t = 1 Sales revenues \$10,000,000 Operating costs 7,000,000 Depreciation 2,000,000 Operating income before taxes \$ 1,000,000 Taxes (40%) 400,000 Operating income after taxes \$ 600,000 Add back depreciation 2,000,000 Operating cash flow \$ 2,600,000 b. The cannibalization of existing sales needs to be considered in this analysis on an after-tax basis, because the cannibalized sales represent sales revenue the firm would realize without the new project but would lose if the new project is accepted. Thus, the after-tax effect would be to reduce the firm’s operating cash flow by \$1,000,000(1 – T) = \$1,000,000(0.6) = \$600,000. Thus, the firm’s OCF would now be \$2,000,000 rather than \$2,600,000. c. If the tax rate fell to 30%, the operating cash flow would change to: Operating income before taxes \$1,000,000 Taxes (30%) 300,000 Operating income after taxes \$ 700,000 Add back depreciation...
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Chapter12Solutions - Chapter 12 Problem Solutions 12-1 a...

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