Week 4 Homework Problems

Week 4 Homework Problems - Week 4 Homework Problems Dustin...

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Week 4 Homework Problems Dustin Taylor Chadron State College FIN 631 – Managerial Finance Chapter 8 #22 a. b. The new machine has higher depreciation than the old machine. The tax savings will cause the new machine to have a positive net present value. Cost of new machine $11,500,000 Old machine book value $3,000,000 Old machine market value $5,200,000 Years of operation 4 Saved operating costs $2,500,000 Net working capital $190,000 Required return 10% Tax rate 40% *Depreciation straight-line Buy new machine Keep old machine Time 0 Cash Flow: Purchase new machine $(11,500,000) $(11,500,000) Net working capital (190,000) (190,000) Sell (buy) old machine $(5,200,000) 5,200,000 Taxes on old machine 880,000 (880,000) Total $(11,690,000) $(4,320,000) $(7,370,000) Incremental cash flows Operating expense $2,500,000 $2,500,000 Depreciation 2,875,000 $750,000 2,125,000 EBT $(375,000) $(750,000) $375,000 Taxes (150,000) (300,000) 150,000 Net income $(225,000) $(450,000) $225,000 OCF $2,650,000
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This note was uploaded on 04/02/2012 for the course FIN 631 taught by Professor Leland during the Spring '12 term at Chadron State College.

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Week 4 Homework Problems - Week 4 Homework Problems Dustin...

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