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# 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. d. The project has an NPV of -\$6,705. Thus, it should not be accepted.
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answers-odd-problems-ch11 - Chapter 11 Cash Flow Estimation...

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