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Solution 6

# Solution 6 - Solutions for Tutorial 6 11.1 Accounting...

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Solutions for Tutorial 6 11.1 Accounting earnings can differ from cash flows for a number of reasons, making accounting earnings an unreliable measure of the costs and benefits of a project. For example, ease of manipulating earnings components such as accounts receivable and depreciation may result in distorted estimation of capital budgeting; using forecasted cash flows eliminates such possibilities. In addition, because there is time value of money, cash flows better reflect the actual available funds to be distributed to shareholders at each point in time. 11.5 The relevant cash flows include the sale price of the machine, as well as the tax on the capital gain: 1,000,000 – 0.3(1,000,000 – 800,000) = \$940,000 When the market price of the machine is changed to \$600,000, the relevant cash flows include the sale price and tax saving on capital loss: 600,000+ 0.3(800,000 – 600,000) = \$660,000 11.13 You need first calculate the NPV of costs for each of the motorcycles: NPV A = 9,000 + 800*(((1.1)

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Solution 6 - Solutions for Tutorial 6 11.1 Accounting...

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