Solution_to_Comprehensive_Example_p168_rev_F10(2)

Solution_to_Comprehensive_Example_p168_rev_F10(2) - . 75 -...

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Solution to Comprehensive Example: (IMPORTANT) This is how you must The facilities cost at Rimouski of $5 . 5 million is a sunk cost and irrelevant to the decision about the machine. Construction Phase Costs - remember to count incremental cash flows: Machine: -$175,000 Shipping & Installation: - 35,000 Net working capital - 8,000 + scrap value of old machine + 18,000 -$200,000 PV of Depreciation Tax Shield: Since we are given a depreciation rate and no other information we assume depreciation is on a declining balance basis. Do not include NWC. n j 3 PV(T x CCA) = dxT C x (1+k/2) - S j=1 k+d ± (1 + k) (1+k) ² n = . 25( . 35) $192,000 x 1 . 065 - $9,000 . 13+ . 25 ± 1 . 13 1 . 13 ² 12 = . 0875 [ $180,955
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Unformatted text preview: . 75 - $9000 / 4 . 3345] . 38 = . 23 x $178,879 . 4 = +$41,142.26 Operating Cash Flows - consider only incremental cash flows. Old machine cost $68,000 to run, the new one only costs $35,000. Thats a savings of $33,000 per year before tax- a positive cash flow consideration. PV of $33,000(1-.35) per year for 12 years at 13% = $21,400 x 5 . 9176 = +$126,932.5 Ending Phase Cash Flows: PV of scrap value plus release of NWC Scrap value plus NWC = $9,000 + $8,000 = $17,000 PV of End Phase CF = $17,000 x 1 / 1 . 13 = +$3922 12 TOTAL PV of Project = -$200,000 + $41,142 . 26 +$126,932 . 5 + $3,922 = -$28,003 NPV is negative so the company should reject the project. 168...
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