chap009- finance

chap009- finance - Solutions to Chapter 9 Using Discounted...

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Unformatted text preview: Solutions to Chapter 9 Using Discounted Cash-Flow Analysis to Make Investment Decisions 1. Net income = ($74 - $42 - $10) - [0.35 × ($74 - $42 - $10)] =$22 - $7.7 = $14.3 million • revenues - cash expenses - taxes paid = $74 - $42 - $7.7 = $24.3 million • after-tax profit + depreciation = $14.3 + $10 = $24.3 million • (revenues - cash expenses) × (1 - tax rate) + (depreciation × tax rate) = ($32 × 0.65) + ($10 × 0.35) = $24.3 million 2. a. ∆ NWC = ∆ Accounts Receivable + ∆ Inventory - ∆ Accounts Payable = - $1,000 + $500 - $2,000 = - $2,500 b. Cash flow = $36,000 - $24,000 + $2,500 = $14,500 3. Net income = ($7 - $4 - $1) - [0.35 × ($7 - $4 - $1)] = $2 - $0.7 = $1.3 million • revenues - cash expenses - taxes paid = $3 - $0.7 = $2.3 million • after-tax profit + depreciation = $1.3 + $1.0 = $2.3 million • (revenues - cash expenses) × (1 - tax rate) + (depreciation × tax rate) = ($3 × 0.65) + ($1 × 0.35) = $2.3 million 4. While depreciation is a non-cash expense, it has an impact on net cash flow because of its impact on taxes. Every dollar of depreciation expense reduces taxable income by one dollar, and thus reduces taxes owed by $1 times the firm's marginal tax rate. Accelerated depreciation moves the tax benefits forward in time, and thus increases the present value of the tax shield, thereby increasing the value of the project. 5. Gross revenues from new chip = 12 million × $25 = $300 million Cost of new chip = 12 million × $8 = $96 million Lost sales of old chip = 7 million × $20 = $140 million Saved costs of old chip = 7 million × $6 = $42 million Increase in cash flow = ($300 – $96) – ($140 – $42) = $106 million 9-: 6. Revenue $160,000 Rental costs 30,000 Variable costs 50,000 Depreciation 10,000 Pretax profit 70,000 Taxes (35%) 24,500 Net income $45,500 7. a. net income + depreciation = $45,500 + $10,000 = $55,500 b. revenue – rental costs – variable costs – taxes = $160,000 – $30,000 – $50,000 – $24,500 = $55,500 c. [(revenue – rental costs – variable costs) × (1–0.35)] + (depreciation × 0.35) = [($160,000 – $30,000 – $50,000) × 0.65] + ($10,000 × 0.35) = $52,000 + $3,500 = $55,500 8. Change in working capital = ∆ Accounts receivable – ∆ Accounts payable = ($4500 – $1200) – ($300 – $700) = $3,700 Cash flow = $16,000 – $9,000 – $3,700 = $3,300 9. Incremental cash flows are: b. The current market value of the painting (i.e., the cash that could have been realized by selling the art). d. The reduction in taxes due to its declared tax deduction. 10. Revenue $120,000 Variable costs 40,000 Fixed costs 15,000 Depreciation 40,000 Pretax profit 25,000 Taxes (35%) 8,750 Net income 16,250 Depreciation 40,000 Operating cash flow $ 56,250 9-¡ 11. a....
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chap009- finance - Solutions to Chapter 9 Using Discounted...

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