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Ch 10 B23_Correct

# Ch 10 B23_Correct - Chapter 10 Homework The solution for...

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Chapter 10 Homework The solution for B23 uses the wrong cost of capital. B23. Racine Machine is in the 40% tax bracket and has an 11% cost of capital . Racine is considering a capital project that involves a 100,000 investment outlay and a 10 year life. Operating revenues will be increased by 55,000 annually, and cash operating costs will be increased by 25,000 annually. Salvage value is zero. a. r = 12% Year R - E D CFAT PV 0 \$(100,000) \$ - \$(100,000.00) \$(100,000.00) 1 \$ 30,000 \$16,666.67 \$ 24,666.67 \$ 22,023.81 2 \$ 30,000 \$16,666.67 \$ 24,666.67 \$ 19,664.12 3 \$ 30,000 \$16,666.67 \$ 24,666.67 \$ 17,557.25 4 \$ 30,000 \$16,666.67 \$ 24,666.67 \$ 15,676.11 5 \$ 30,000 \$16,666.67 \$ 24,666.67 \$ 13,996.53 6 \$ 30,000 \$16,666.67 \$ 24,666.67 \$ 12,496.90 7 \$ 30,000 \$ - \$ 18,000.00 \$ 8,142.29 8 \$ 30,000 \$ - \$ 18,000.00 \$ 7,269.90 9 \$ 30,000 \$ - \$ 18,000.00 \$ 6,490.98 10 \$ 30,000 \$ - \$ 18,000.00 \$ 5,795.52 NPV = \$ 29,113.40 IRR = 19.26% D = \$100,000 / 6 = \$16,666.67. CFAT = (R - E)(1 - T) + TD. Correction: r= 11% Year R - E D CFAT PV 0 (\$100,000) \$ - (\$100,000.00) (\$100,000.00) 1 \$30,000 \$16,666.67 \$24,666.67 \$22,222.23 2 \$30,000 \$16,666.67 \$24,666.67 \$20,020.02 3 \$30,000 \$16,666.67 \$24,666.67 \$18,036.06 4 \$30,000 \$16,666.67 \$24,666.67 \$16,248.70 5 \$30,000 \$16,666.67 \$24,666.67 \$14,638.47 6 \$30,000 \$16,666.67 \$24,666.67 \$13,187.81 7 \$30,000 \$ - \$18,000.00 \$8,669.85 8 \$30,000 \$ - \$18,000.00 \$7,810.68 9 \$30,000 \$ - \$18,000.00 \$7,036.65 10 \$30,000 \$ - \$18,000.00 \$6,339.32 NPV \$34,209.78 IRR 19.26%

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The remaining parts: b. r = 12% Year R - E D CFAT PV 0 \$(100,000) \$ - \$(100,000.00) \$(100,000.00) 1 \$ 30,000 \$20,000.00 \$ 26,000.00 \$ 23,214.29 2 \$ 30,000 \$32,000.00 \$ 30,800.00 \$ 24,553.57 3 \$ 30,000 \$19,200.00 \$ 25,680.00 \$ 18,278.52 4 \$ 30,000 \$11,520.00 \$ 22,608.00 \$ 14,367.79 5 \$ 30,000 \$11,520.00 \$ 22,608.00 \$ 12,828.39 6 \$ 30,000 \$ 5,760.00 \$ 20,304.00 \$ 10,286.64 7 \$ 30,000 \$ - \$ 18,000.00 \$ 8,142.29 8 \$ 30,000 \$ - \$ 18,000.00 \$ 7,269.90
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Ch 10 B23_Correct - Chapter 10 Homework The solution for...

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