F301 Financial Management
Exam 2 Solutions
Spring 2011
You can click on a cell to see the formula and cell references used.
Version A
Tax rate
39%
0
1
2
3
4
7-year MACRS
OCF (given)
50,000
60,000
60,000
60,000
14.29%
24.49%
NWC in place
10,000
25,000
25,000
25,000
0
17.49%
NWC cash flow
-10,000
-15,000
0
0
25,000
12.49%
8.93%
Cap spending
-275,000
8.93%
Market value
90,000
8.93%
Book value
85,910
4.45%
Gain or loss
4,090
Tax on gain or loss
-1,595
Total terminal cash flow
88,405
Total cash flows
-285,000
35,000
60,000
60,000
173,405
Answers:
1.
-285,000
2.
173,405
Tax rate
40%
0
1
Investment
-40,000
Sales
30,000
Costs
-8,000
Depreciation
-10,000
EBIT
12,000
Tax on EBIT
-4,800
Add back depreciation
10,000
OCF
17,200
Sell investment
32,000
Book
30,000
Gain
2,000
Tax on gain
-800
Net cash flow
31,200
Total Year 1
48,400
Rate
15%
NPV =
2,087
12%
0
1
2
3
4
-10,000
2,000
4,000
6,000
6,000
PVs
1,786
3,189
4,271
3,813
Sum of PVs
9,245
Needed out of next discounted cash flow
755
Fraction of next discounted cash flow
0.20
Discounted payback period = 3.20 years
Use the following information to answer questions 1 and 2.
Your division manager has asked for your help in evaluating a proposal to open a new branch
sales office. This will be a four-year analysis. Furniture, shelving and vehicles to equip the
branch will cost $275,000. The 7-year MACRS depreciation schedule applies, and at the end of
four years, this equipment will have a market value of $90,000. Additional inventory and other
net working capital items will be $10,000 at Time Zero, and an another $15,000 will be added
Year 1. After that, there will be no further increases in NWC. All NWC will be recovered at the
end. OCF already has been calculated, but NWC and capital spending cash flows have not. OCF
is forecast to be $50,000 in the first year and $60,000 per year in all other years. Assume the tax
rate is 39%.
1.
(13 points) If this project is accepted, what is the after-tax initial cash flow (at Time Zero)?
2.