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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