SOLUTIONS CHAPTER 13

SOLUTIONS CHAPTER 13 - CHAPTER 13 OTHER ISSUES IN CAPITAL...

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CHAPTER 13 OTHER ISSUES IN CAPITAL BUDGETING 13-1 (a) Annual depreciation charges are $2,000 or ($20,000/10). Thus, the book value of the old machine is $10,000 or ($2,000 x 5 years). (b) Book value of old machine $10,000 Less: market value of old machine 6,000 Operating loss due to sale $ 4,000 x Tax rate x 0.40 Tax savings $ 1,600 Book value of old machine $10,000 Less: market value of old machine 6,000 tax savings 1,600 Sunk cost $ 2,400 13-2 (a) $2,000 (1 - .46) = $1,080 (b) If the machine is sold before it is fully depreciated, the tax treatment is different. Initial cost of the machine $14,000 Less: accumulated depreciation 4,000 Book value of the machine $10,000 Market value of the machine $13,000 Less: book value of the machine 10,000 Taxable gain $ 3,000 Less: taxes at 46% 1,380 Gain after taxes $ 1,620 (c) If the machine is sold for more than its initial cost, some of the gain is subject to the capital gains tax treatment. Because the machine was sold for $15,000, the total gain would be $5,000 or ($15,000 - $10,000). The gain over the initial cost of the machine or $1,000 ($15,000 - $14,000) is subject to the capital gains tax, while the remaining $4,000 ($14,000 - $10,000) is taxed at the regular tax rate of 46%. Market value of the machine $15,000 Less: book value of the machine 10,000 Gain $ 5,000 Market value of the machine $15,000 Less: capital gains tax ($1,000 x 0.28) 280 regular tax ($4,000 x 0.46) 1,840 Net cash proceeds $12,880
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13-3 The net present value is $10,330 for Project G and $4,662 for Project H. Annualized NPV of Project G = $10,330 / PVAIF 4,10% = $10,330 ÷ 3.170 = $3,259 or by financial calculator: CF 0 = -30000 C01 = 15000; C02 = 10000; C03 = 20000; C04 = 5000 F01 = 1 FOR EACH C0 NPV; I = 10; CPT NPV = $10342.19 Annualized NPV of Project H = $ 4,622 / PVAIF 2,10% = $ 4,622 ÷ 1.736 = $2,662 Project G is more desirable than Project H because it has a higher annualized NPV than Project H. or by financial calculator: CF 0 = -20000 C01 = 18000; C02 = 10000 F01 = 1 FOR EACH C0 NPV; I = 10; CPT NPV = $4628.10 13-4 To determine the annual equivalent of the project's initial cost, use CF = PVA ÷ ADF n,i : CF = $400,000 ÷ PVAIF 4,10 % = $400,000 ÷ 3.170 = $126,183 or by financial calculator: PV = -400000 N = 4 IY = 10 CPT PMT = CF = $126,188.32.10 CF = $700,000 ÷ PVAIF 7,10% = $700,000 ÷ 4.868 = $143,796 or by financial calculator: PV = -700000 N = 7 IY = 10 PT PMT = CF = $143,783.85 The annualized cost of Machine A = $126,183 + $10,000 = $136,183 The annualized cost of Machine B = $143,796 + $6,000 = $149,796 Machine A should be accepted because it has the lower cost than Machine B.
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13-5 Cost of Warehouse = $2,000,000 ÷ ADF 30,10% = $212,157 Cost of Furnace = $ 500,000 ÷ ADF 20,10% = $ 58,727 Cost of Lighting System = $ 200,000 ÷ ADF 15,10% = $ 26,295 Total Annualized Cost $297,179 ------- or by financial calculator: PV = -2,000,000 N = 30 IY = 10 CPT PMT = CF = $212,158.50 or by financial calculator: PV = -500,000 N
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SOLUTIONS CHAPTER 13 - CHAPTER 13 OTHER ISSUES IN CAPITAL...

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