answers-odd-problems-ch11

answers-odd-problems-ch11 - Chapter 11 Cash Flow Estimation...

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Chapter 11 Cash Flow Estimation and Risk Analysis SOLUTIONS TO END-OF-CHAPTER PROBLEMS 11-1 Equipment $ 9,000,000 NWC Investment 3,000,000 Initial investment outlay $12,000,000 11-3 Equipment's original cost $20,000,000 Depreciation (80%) 16,000,000 Book value $ 4,000,000 Gain on sale = $5,000,000 - $4,000,000 = $1,000,000. Tax on gain = $1,000,000(0.4) = $400,000. AT net salvage value = $5,000,000 - $400,000 = $4,600,000. 11-5 a. The net cost is $89,000: Price ($70,000) Modification (15,000) Change in NWC (4,000 ) ($89,000 ) b. The operating cash flows follow: Year 1 Year 2 Year 3 After-tax savings $15,000 $15,000 $15,000 Depreciation shield 11,220 15,300 5,100 Net cash flow $26,220 $30,300 $20,100 Notes: 1. The after-tax cost savings is $25,000(1 – T) = $25,000(0.6) = $15,000. 2. The depreciation expense in each year is the depreciable basis, $85,000, times the MACRS allowance percentage of 0.33, 0.45, and 0.15 for Years 1, 2 and 3, respectively. Depreciation expense in Years 1, 2, and 3 is $28,050, $38,250, and Mini Case: 11 - 1
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$12,750. The depreciation shield is calculated as the tax rate (40%) times the depreciation expense in each year. c. The additional end-of-project cash flow is $24,380: Salvage value $30,000 Tax on SV* (9,620) Return of NWC 4,000 $24,380 *Tax on SV = ($30,000 - $5,950)(0.4) = $9,620. Note that the remaining BV in Year 4 = $85,000(0.07) = $5,950.
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This note was uploaded on 04/12/2011 for the course ECON 101 taught by Professor Buddin during the Spring '08 term at UCLA.

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answers-odd-problems-ch11 - Chapter 11 Cash Flow Estimation...

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