SOLUTIONS CHAPTER 12 - CHAPTER 12 CAPITAL BUDGETING UNDER...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 12 CAPITAL BUDGETING UNDER CERTAINTY 12-1 (a) Net Cash Investment Book value of old equipment $ 5,000 Less: market value of old equipment 2,000 Operating loss due to sale $ 3,000 x Tax rate x 0.50 Tax savings $ 1,500 Price of new equipment $20,000 Less: tax savings $1,500 market value of old equipment 2,000 3,500 Net cash investment $16,500 (b) Annual Net Cash Flows Cash savings $ 2,000 Additional sales 4,000 Additional revenues $ 6,000 Less: additional depreciation depreciation of new equipment $4,000 depreciation of old equipment (1,000) 3,000 Taxable income $ 3,000 Less: taxes at 50% 1,500 Earnings after taxes $ 1,500 Add: additional depreciation 3,000 Annual net cash flows $ 4,500 12.2 (a) Year 1 Year 2 Year 3 Revenues $20,000 $20,000 $20,000 Less: operating cost 4,500 4,500 4,500 Depreciation 4,500 3,000 1,500 Taxable income $11,000 $12,500$14,000 Less: taxes at 40% 4,400 5,000 5,600 Earnings after taxes $ 6,600 $ 7,500$ 8,400 Add: depreciation 4,500 3,000 1,500 Annual net cash flows$11,100 $10,500 $ 9,900
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
(b) Revenues $20,000$20,000 $20,000 Less: operating cost 4,500 4,500 4,500 depreciation 6,000 2,000 1,000 Taxable income $ 9,500$13,500 $14,500 Less: taxes at 40% 3,800 5,400 5,800 Earnings after taxes $ 5,700$ 8,100 $ 8,700 Add: depreciation 6,000 2,000 1,000 Annual net cash flows 11,700 $10,100 $ 9,700 12-3 (a) Net Cash Investment Book value of old machine $ 5,000 Less: market value of old machine 4,000 Operating loss due to sale $ 1,000 x Tax rate x 0.40 Tax savings $ 400 Purchase price of new machine $ 8,000 Freight and installation cost 2,000 Total cost of new machine $10,000 Less: tax savings $ 400 market value of old machine 4,000 4,400 Net cash investment $ 5,600 (b) Incremental Net Cash Flows OLD MACHINE Years 1-5 Revenues $2,000 Less: operating cost 500 Depreciation 1,000 Taxable income $ 500 Less: taxes at 40% 200 Earnings after taxes $ 300 Add: depreciation 1,000 Annual net cash flows $1,300
Background image of page 2
NEW MACHINE Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Revenues $10,000 $9,000 $8,000 $7,000 $6,000 $5,500 Operating cost 3,500 3,500 3,500 3,5003,500 3,500 Depreciation 2,000 2,000 2,000 2,000 2,000 ______ Taxable income $ 4,500 $3,500 $2,500 $1,500 $ 500 $2,000 Taxes at 40% 1,800 2,400 1,000 600 200 800 EAT $ 2,700 $2,100 $1,500 $ 900 $ 300 $1,200 Depreciation 2,000 2,000 2,000 2,000 2,000 Net cash flows $ 4,700 $4,100 $3,500 $2,900 $2,300 $1,200 Incremental Net Cash Flows of the Project Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 New machine $ 4,700 $4,100 $3,500 $2,900$2,300 $1,200 Old machine 1,300 1,300 1,300 1,300 1,300 1,300 Net cash flows$ 3,400 $2,800 $2,200 $1,600 $1,000 - $100 _ 12-4 Net Cash Investment = $35,000 Net cash flows Years 1-7 Savings in operating costs $8,000 Less: depreciation 5,000 Taxable income $3,000 Less: taxes at 46% 1,380 Earnings after taxes $1,620 Add: depreciation 5,000 Annual net cash flows $6,620 (a) Payback period = $35,000 ÷ $ 6,620 = 5.29 years (b) Average rate of return = $1,620 ÷ ($35,000 / 2)
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/20/2012 for the course FIN 7023 taught by Professor Wald during the Spring '12 term at The University of Texas at San Antonio- San Antonio.

Page1 / 15

SOLUTIONS CHAPTER 12 - CHAPTER 12 CAPITAL BUDGETING UNDER...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online