Ch 12 Examples

Ch 12 Examples - Avg NI/Initial Investment = 1800/20,000 =...

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Ch 12 Examples Wednesday, April 06, 2011 9:48 AM A Co is considering investing $20,000 in a new more efficient machine that can save $8000 per year before taxes. Machine has 4 year life, 0 salvage value and is depreciated using the straight-line method. Tax = 40%, K (cost of capital) = 12% What is cash flow after taxes? Savings 8000 -Depreciation 5000 NI before Taxes 3000 -Taxes (40%) 1200 NI after Taxes 1800 +Depreciation 5000 CFAT 6800 OR Savings (1-T)(amt) = (.6)(8000) = 4800 inflow Depr (t)(amt) = (.4)(5000) = 2000 inflow Total = CFAT = 6800 What is the payback? Investment/CFAT = 20,000/6800 = 2.941 years 1. What is the accrual accounting rate of return on initial investment?
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Unformatted text preview: Avg NI/Initial Investment = 1800/20,000 = 0.09 = 9% 1. What is NPV? - Net Present Value NPV = -20,000 + 6800 (1 - (1/1.12) 4 //.12)-20,000 + 6800 (3.037)-20,000 [PV of cash outflow] + 20,652 [PV of cash inflow] = 652 [positive, so accepted] Accept Reject NPV +, >0-, <0 IRR >Hurdle Rate <Hurdle Rate PI >1 <1 1. What is the profitability index? PI = PV of CI / PV of CO = 20,652/20,000 = 1.0326 [greater than 1, so accepted] 1. What is the IRR? [Internal Rate of Return] 0 = -20,000 + 6800(2.941) --- for n = 4, solving for r = N = 4, 12%/3.3037. 15%/2.855. 14%/2.913. 13%/2.974 a. 111 Hurdle Rate = K, cost of Capital...
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Ch 12 Examples - Avg NI/Initial Investment = 1800/20,000 =...

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