Solution_to_Comprehensive_Example_p168_rev_F10

# Solution_to_Comprehe - 56 \$9000 4 3345 38 = 23 x \$186,419 2 = \$42,876.42 Operating Cash Flows consider only incremental cash flows Old machine cost

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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. 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) \$200,000 x 1 . 065 - \$9,000 . 13+ . 25 ± 1 . 13 1 . 13 ² 12 = . 0875 [ \$188,495
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Unformatted text preview: . 56 - \$9000 / 4 . 3345] . 38 = . 23 x \$186,419 . 2 = +\$42,876.42 Operating Cash Flows - consider only incremental cash flows. Old machine cost \$68,000 to run, the new one only costs \$35,000. That’s 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 + \$42,876.42 +\$126,932.5 + \$3,922 = -\$26,269 NPV is negative so the company should reject the project. 168...
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## This note was uploaded on 05/17/2011 for the course COMM 308 taught by Professor Ravimateti during the Spring '10 term at Concordia Canada.

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