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.
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This note was uploaded on 09/18/2011 for the course FIN 303 taught by Professor Bernile during the Spring '11 term at University of Miami.

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

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