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Ch 10 Problems Rev

# Ch 10 Problems Rev - Example Cost Cutting Your company is...

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------- Example: Cost Cutting • Your company is considering a new computer system that will initially cost \$1 million. It will save \$300,000 per year in inventory and receivables management costs. The system is expected to last for five years and will be depreciated using 3-year MACRS. The system is expected to have a salvage value of \$50,000 at the end of year 5. There is no impact on net working capital. The marginal tax rate is 40%. The required return is 8%. ~r Y!Lf 1'Q..~a..A-~ 0 V\ 33""3) 300 l) x:. (bOO 000 .. 44<.\:'5 Lf44-) 5D 6 '50000 -2) o 3) .. \4:<6"\ 14<6"\1 06 '('4 1 IOu ~) , i ye0...r6 l -z.o 000 \ - 4- 30 0 \ 0 (5 0 5Ci.D;Aj5 , r J)€..f re.Q...L~l D Y1 - "3??j?OO .. --- _ ??? 0 0 - I?::> W - J qq ~ +- 5~3 ~~O 31,??2b ye..o..s- S ---- O~ 19 0 \OD6 3S"1,~O O'G1=" - "Z ~Q.er -z.-Lf'D <;e~\ ~O 00 0 ocF - L- -=:, 9 J ""2.> ljeAJ -("<\.o...C'\'\ \ '1\ e ) ro Lf 0 ocF - '2r-o 9 I 00 ~or Lt A ~J l -h.J<. _?-b I 0 -' j Y-o 00 0 ocF "6~ S; ~ I -e -\- '"Z...-l 0 1000 looOOOG) 't313~"Z-t» 35lYOO) 2-59'2-i-O) GO 9 f.J:> 40) LI 0 (:) 0 0 €;) ~ ~ "=3) --[<1 -,. S

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Example: Equivalent Annual Cost Analysis • Burnout Batteries • Long-lasting Batteries - Initial Cost = \$36 each - Initial Cost = \$60 each 3-year life 5-year life - \$100 per year to keep \$88 per year to keep charged charged Expected salvage = \$5 Expected salvage = \$5 Straight-line - Straight-line depreciation depreciation The machine chosen will be replaced indefinitely and neither machine will have a differential impact on revenue. No change in NWC is required. IXI The required return is 15%, and the tax rate is 34%. 10-28 Burnout Initial Cost 36 Tax Rate 34% Operating Cost 100 Required Return 15% Depreciation 10 Expected Salvage 5 After-tax salvage 5 Year 0 I 2 3 OCF -62.49 -62.49 -62.49 NCS -36.00 5.00 NWC 0.00 0.00 CFFA -36.00 -62.49 -62.49 -57.49 NPV -\$175.38 EAC -S76.8l Long-lastilfg Initial Cost 60 Tax Rate 34% Operating Cost 88 Required Return 15% Depreciation 11 Expected Salvage 5 After-tax salvage 5 Year 0 2 3 4 5 OCF -54.34 -54.34 -54.34 -54.34 -54.34 NCS -60.00 5.00 NWC 0.00 0.00 CFFA -60.00 -54.34 -54.34 -54.34 -54.34 -49.34 NPV -\$239.67 9.28
Comprehensive Problem • A \$1,000,000 investment is depreciated using a seven-year MACRS class life. It requires \$150,000 in additional inventory and will increase accounts payable by \$50,000. It will generate \$400,000 in revenue and \$150,000 in cash expenses annually, and the tax rate is 40%. What is the incremental cash flow in years 0, 1,7, and 8? 1<>'31 Annual depreciation expense: Year 1: .1429 x \$lmillion = \$142,900 Year 7: .0893 x \$Imillion = \$89,300 Year 8: .0446 x \$Imillion = \$44,600 Time 0 cash flow = -\$lmi1lion investment - (\$150,000 - \$50,000) = -\$1,100,000 Time I and 7 cash flow = (\$400,000 - \$150,000) x (I -.4) + (.4 x \$89,300) = .

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