# Ch 12 - SolutionstoEndofChapterProblems 12%10%12% 12%...

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10% 12% 12% 12% 10% 10% 10% 16% 12% Solutions to End-of-Chapter Problems 12-1 a. Equipment \$  9,000,000 NWC Investment     3,000,000 Initial investment outlay \$12,000,000 b. No, last year’s \$50,000 expenditure is considered a sunk cost and does not represent an  incremental cash flow.  Hence, it should not be included in the analysis. c. The potential sale of the building represents an opportunity cost of conducting the project in that  building.  Therefore, the possible after-tax sale price must be charged against the project as a cost. 12-2 a. Project cash flows:  t = 1 Sales revenues \$10,000,000 Operating costs   7,000,000 Depreciation     2,000,000 Operating income before taxes \$  1,000,000 Taxes (40%)        400,000 Operating income after taxes \$     600,000 Add back depreciation     2,000,000 Project cash flow \$  2,600,000 b. The cannibalization of existing sales needs to be considered in this analysis on an after-tax  basis, because the cannibalized sales represent sales revenue the firm would realize without  the new project but would lose if the new project is accepted.  Thus, the after-tax effect would  be to reduce the project’s cash flow by \$1,000,000(1 – T) = \$1,000,000(0.6) = \$600,000.  Thus,  the project’s cash flow would now be \$2,000,000 rather than \$2,600,000. c. If the tax rate fell to 30%, the project’s cash flow would change to: Operating income before taxes \$1,000,000 Taxes (30%)      300,000 Operating income after taxes \$   700,000 Add back depreciation   2,000,000 Project cash flow \$2,700,000 Thus, the project’s cash flow would increase by \$100,000.

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12-3 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. 12-4 Cash outflow = \$40,000. Increase in annual after-tax cash flows:  CF = \$9,000. Place the cash flows on a time line: 0 1 2 10 | | |  • • •  | -40,000 9,000 9,000 9,000 With a financial calculator, input the appropriate cash flows into the cash flow register, input I/YR =  10, and then solve for NPV = \$15,301.10.  Thus, Chang should purchase the new machine. 12-5 a. The applicable depreciation values are as follows for the two scenarios: Scenario 1 Scenario 2 Year (Straight-Line)  (MACRS)     1 \$200,000 \$264,000 2 200,000 360,000 3 200,000 120,000 4 200,000 56,000 b. To find the difference in net present values under these two methods, we must determine the  difference in incremental cash flows each method provides.  The depreciation expenses cannot  simply be subtracted from each other, as there are tax ramifications due to depreciation
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## This note was uploaded on 09/09/2011 for the course BUSINESS 300 taught by Professor N/a during the Spring '09 term at DeVry Chicago.

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Ch 12 - SolutionstoEndofChapterProblems 12%10%12% 12%...

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