tut4sol - FINS 5514 Week 4 Making Capital Investment...

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FINS 5514 Week 4: Making Capital Investment Decisions Solutions 1. b The opportunity cost, which is the value you should use in your analysis, is the appraisal value of $36,900. 2. b Depreciation = $78,000 ÷ 3 = $26,000 EBIT = [12,000 × ($14.99 - $5.89)] - $61,234 - $26,000 = $21,966 Tax = $21,966 × .34 = $7,468.44 OCF = $21,966 + $26,000 - $7,468.44 = $40,497.56 = $40,498 3. b Book value at the end of year 2 = $967,400 × (1.00 - .20 - .32) = $464,352 4. d Tax on sale = {$50,000 – [(3 ÷ 5) × $82,190]} × {.34} = $233.24; After-tax cash flow = $50,000 - $233.24 = $49,766.76 = $49,767 5. a Annual depreciation tax shield = ($313,000 ÷ 7) × .35 = $15,650 6. c 4 3 2 1 ) 12 . 1 ( 000 , 20 $ - ) 12 . 1 ( 000 , 20 $ - ) 12 . 1 ( 000 , 20 $ - ) 12 . 1 ( 000 , 20 $ - 000 , 389 $ - + + + + + + + + = A NPV =- $449,746.99 [ ] + × = 12 . ) 12 . 1 /( 1 1 99 . 746 , 449 $ 4 A EAC ; EAC = -$148,072.19 = -$148,072 2 1 ) 12 . 1 ( 000 , 26 $ - ) 12 . 1 ( 000 , 26 $ - 000 , 220 $ - + + + + = B NPV = -$263,941.33 - [ ] + × = 12 . ) 12 . 1 /( 1 1 33 . 941 , 263 $ 2 EAC ; EAC = -$156,173.59 = -$156,174 The answer states that the EAC of machine A is $148,072. 7. c Initial net working capital = $23,000 - $7,000 + $5,000 = $21,000 8. a 9. a 10. c
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