Chapter 12 Homework Problems Solutions

Chapter 12 Homework Problems Solutions -...

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Solutions to End-of-Chapter Problems (Note: The textbook you have, the concise 6 th   edition, does not include the questions on  replacement chain and EAA methods, and, as a result, the question numbers are different from  those in my edition.  I have synchronized the problem numbers from both editions of the text in  the solutions.  The numbers in red are those you have for your textbook.) 12-1 from your book  (12-1) from the Instructor edition 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 from your book  (12-2) from the Instructor edition 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. 
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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. 12-3 from your book  (12-3) from the Instructor edition 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 from your book  (12-4) from the Instructor edition Cash outflow = $40,000. Increase in annual after-tax cash flows:  CF = $9,000.
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Chapter 12 Homework Problems Solutions -...

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