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hw24_25_26sol

# hw24_25_26sol - Problem 24 From problem 22 solution...

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Problem 24 From problem 22 solution: Incremental revenue \$113,150 Incremental expenses: Driver (64,800) Operating (19,400) Depreciation Depreciation (12,560) \$84,800 - \$22,000 Income before taxes 16,390 5 Income tax expense (5,737) Net income 10,654 Add depreciatio 12,560 Operating cash flows \$23,214 1-1-10 2011 2012 2013 2014 2015 Annual operating cash flows \$23,214 \$23,214 \$23,214 \$23,214 \$23,214 Cost to buy machine \$(84,800) Salvage value 22,000 Net cash flows \$(84,800) \$23,214 \$23,214 \$23,214 \$23,214 \$45,214 A. Payback period Amount to recover \$84,800 Year 1 recovery (23,214) Year 2 recovery (23,214) Year 3 recovery (23,214) Balance for year 4 15,160 portion of recovery in year 4: \$15,160/\$23,214 = 0.6530 Payback period = 3.65 years It will take the company 3.65 years to recover all dollars invested into the project. B. ARR = \$10,654 = 19.95% [(\$84,800 + \$22,000) / 2] The company will earn about a 19.95% return in profit on the average value of its investment per year ov Because this exceeds the company's minimum rate of return of 8.7%, it should undertake the investmen

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ver 5 years. nt.
Problem 25 A. Incremental insurance savings \$18,100 Incremental depreciation (17,229) Depreciation Income before taxes 871 \$120,600 - \$0 Income tax expense (279) 7 Net income 593 Add depreciation 17,229

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