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08 05 to 10 Solution

08 05 to 10 Solution - MFMI 1 of 3 08 05 to 10 solution 5A...

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MFMI 1 of 3 08 - 05 to 10 solution 5 A The present value of the cash flows, discounted at 10 %, is \$60 for each asset. B. IRR 10.00% Depreciation Ending Cash Flow Income expense Book Value ROA (60.00) 60.00 Asset A 26.00 6.00 20.00 40.00 10.00% 24.00 4.00 20.00 20.00 10.00% 22.00 2.00 20.00 - 10.00% IRR 10.00% Depreciation Ending Cash Flow Income expense Book Value ROA (60.00) 60.00 Asset B 36.00 6.00 30.00 30.00 10.00% 23.00 3.00 20.00 10.00 10.00% 11.00 1.00 10.00 - 10.00% IRR 20.00% Depreciation Ending Example a Cash Flow Income expense Book Value ROA (60.00) 60.00 1 32.00 12.00 20.00 40.00 20.00% 2 28.00 8.00 20.00 20.00 20.00% 3 24.00 4.00 20.00 (0.00) 20.00% IRR 20.00% Depreciation Ending Example b Cash Flow Income expense Book Value ROA (60.00) 60.00 1 42.00 12.00 30.00 30.00 20.00% 2 26.00 6.00 20.00 10.00 20.00% 3 12.00 2.00 10.00 (0.00) 20.00% C. The pattern for Asset A is the sum-of-the-years' digits method. The pattern for Asset B is the straight-line method. 6.A. \$ (14) - \$27 - \$19 \$ (60) [No cumulative effect and 1991 earnings increase would not have occurred.] B. We can infer that the level of production in all three years was lower than the "normal" level at which t he accounting change would make no difference. At higher levels of production, pro forma net income would be lower as depreciation expense would be higher under the units-of-production method. C. The change in deprecation method had no effect on cash flow in 1991 as depreciation is a noncash expense. D. The change in method should tend to stabilize Cummins ' net income in future years, as depreciation expense has become a variable cost rather than a fixed cost.

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