Chapter 10 Aplia Problems with Solutions

# Chapter 10 Aplia Problems with Solutions - CHAPTER 10 —...

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Unformatted text preview: CHAPTER 10 — PROIECT CASH FLOWS AND RISK 1. Operating Cash Flows and Depreciation AW Bewcastle Technologies is evaluating a new project that requires \$1,200,000 in new equipment. Bewcastle estimates that the new project will generate \$1,400,000 in annual sales at the end of each of the next four years and that total operating gosts (variable and fixed costs excluding depreciation) will equal \$600,000. Suppose that the firm depreciates the equipment using the straight-line method over four years and the firm’s tax rate is 40%. If the projects required return is 11%, what is the total present value of the annual operating cash ﬂows received over the project’s four-year life? L, cg, = o. — 1,200,000 1,400,000 1,400,000 1,400,000 woopoo S — 200,000 - 000 '- bO0,000 -' 900.000 CL 800,000 5.0000000?D 800,000 zooij -500 000 "‘ 500, — 300,000 __ EQOOOO D BEmECIATIDN: 500,000 333,588 \$30:— 500‘0008 56f I,200,000 ’ 200000 2,4,- “- -— 200 0 T 4 aoqooo 500000 500,000 300,000 NI 3 300,000 + 300 000 w :1: SUDDDO (H0 (000,000 0200900 W710“) (000,000 NCF TAX I A game WSlNE: 613:3 m .95 “8‘33” zzoqooo CFO: 0 CDl=bOQ000 F0""‘ mass NW: I=~HZ L err NW: *‘lﬁlﬂwnm Suppose that Bewcastle uses Modiﬁed Accelerated Cost Recovery System (MACRS) depreciation rates instead. The applicable rates are 33%, 45%, 15%, and 7%, respectively. Recalculate the ﬁrm’s operating cash ﬂows and find their total present value now (still assuming a required return of 11%). l— j 5t 7 1‘ ~ l,200,000 1,300,000 5400,000 lﬁoopoo 1,400,000 3 , w -"" 000,000 .— 1000 000 .. (000 000 0 IW‘ \$00,000 300,000 800,000 \$00,000 1 : 3%005 «3%,000 ~— 640. 000 —-— 150,000 r“ 94000 D . 404,000 290,000 a 000 \$0,000 BET Lzoo,a)0~>e0.'+‘5 “10,900 --|0ng00 —— 2 I000 eZS’lpﬂOO T 5640.000 242,400 60,000 54200) qijwo m: .1) mg wow?» 1%?)— M M 0);) {A g @000 (a i 00 meow 552,000 5am) W ._ A Game, Bp‘vﬂ PLus g5 aster: 510000on01 (3:030 COP-(953,400 Fowl (Lovmmoo Pal—ﬂ _“.g""’33,0 0173:66me F05=| cott=5I5,(ooo F044 W‘EB -' P2553 NW: Isnv. l OPT NW: tusslamazz A_ CHAPTER 10 - PROIECT CASH FLOWS AND RISK 2. Project Analysis Bedwyn Inc. has summarized the expected cash flows from a proposed project below. 0‘ ll 2‘ AT 41 Total Investment Outlay -\$500,000 Operating Cash Flow \$150,000 \$150,000 \$150,000 \$150,000 Total Terminal Cash Flow \$70 I000 8 £20,000 If the projecys required return is 12%, what is the project’s W? BA'II Plus 9E Zagislzr: CE, = —500,000 cm = 50,000 FDl “ 5 g ‘ I COZ: 220,000 G 150,000 + flopcso) an: 1 Page NPV: 1:127. J, err NPV= \$38.04 The firm used its required return, or discount rate, of 12% to evaluate this project because it believes the project is of average risk. Suppose that the project actually had lower-than-average risk, and the CFO thinks the discount rate should be risk—adjusted. What effect would this have on the project’s NPV? increase f...— FV I PV == 7 t (l w?) l Bedwyn Inc. is going to use factory space for this project that it usually rents to other firms. If Bedwyn accepts this project, it will not be able to rent the space anymore. If the firm usually generates \$12,500 per year in after-tax leasing revenue from the factory space, what is the value of the project w en you consider this factor? Assume that Bedwyn still considers the project to have average risk nd uses a required return of 12%. W all Wag Wham“ 5:; 02,600: 13ilraopuw\$12,013 “0% BMI Plus LE WWW = 054,500 m:o = «600,000 001= 2330500 (5%; ZZQOQD’IZIW 1? lgquo*%sm> m: I ¥ 90353 NW: 1:127. \L cPr Nva-“avr,ga_s.20 Suppose Bedwyn’s management team discloses that nearly \$500,000 in research and development costs were incurred before the new project proposal was put together. What effect would this have ionithe project's NPV? This \$500.000M be recouped mamas Of whctmr 7 emqu Inc. doctch in W W0 W P’O‘S‘d“ 0? not: ‘ We will beg no mange. ‘ ‘ ,/\ CHAPTER 10 — PROJECT CASH FLOWS AND RISK 3. Project Analysis: Initial Investment Outlay Hallmere Inc. is considering a project that requires an investment in new equipment of \$4,500,000 and \$500,000 in shipping and installation costs. Hallmere estimates that its accounts receivable and inventories need to increase by \$900,000 to support the new project, some of which will be financed by an increase in spontaneous liabilities (accounts payable and accruals) of \$500,000. What is the project’s initial investment outlay? (Take note of your result as you will use it later.) (50le ‘3 4,600, 000 05925010806 5.an 155,000,000 3%: as 600 000 V ANwo 400,000 INWRL INVESTMENT Wet/{ABLE ‘3 5 000 WC, =ACA9-ACL N = mama-600,000 = 400,000 4. Project Analysis: Annual Operating Cash Flows Again, consider Hallmere Inc., which purchased \$4,500,000 worth of equipment that required \$500,000 in shipping and installation costs. In addition, the ﬁrm's accounts receivable and inventories increased by \$900,000 and its spontaneous liabilities increased by \$500,000. If Hallmere depreciates the full cost of the equipment using straight—line depreciation over four years, what is the project’s annual depreciation expense? WWW: maafmas \$5me 5 \$1,250in ,— a 4% YEARS Ll Suppose the ﬁrm decides instead to depreciate the equipment using Modiﬁed Accelerated Cost Recovery System (MACRS) rates. The equipment falls under the category of a three—year life asset. The depreciation rates over the next four years will be 33%, 45%, 15%, and 7%, respectively. What will the project’s depreciation expense be in the first year if MACRS is used? Wmonm,. zoaacwaaz snag * MAUZSf/o 2 155,000,000 a 0.6% = \$1,050,000 Hallmere’s project is expected to generate net annual sales revenue of \$7,500,000 at the end of each of the next four years. Total operating costs (ﬁxed and variable costs excluding depreciation) are expected to equal \$4,300,000. Suppose the ﬁrm uses the straight-line method to depreciate the equipment and the ﬁrm’s tax rate is 40%. What is the project’s annual operating cash ﬂow? 15i’r.‘500.000 S DEP: Peon/t Acove J4,%00, 000 C TAX = 9-561”? 0‘40 3,200,000 3:60:00" “1,250,000 D M60000 661’ _ C\$0,000 T I, no 000 N1: + i,z50,‘000 000 2,420,000 MOP CHAPTER 10 — PROJECT CASH FLOWS AND RISK 5. Project Analysis: Terminal Year Cash Flows Again, consider Hallmere Inc., which purchased \$4,500,000 worth of equipment that required \$500,000 in shipping and installation costs. In addition, the ﬁrm's accounts receivable and inventories increased by \$900,000 and its spontaneous liabilities increased by \$500,000. Hallmere’s net annual sales revenue is expected to be \$7,5 00,000 at the end of each of the next four years, and total operating costs [fixed and variable costs excluding depreciation) will be \$4,300,000. Assume that the firm uses the straight-line depreciation method to depreciate the equipment. Suppose the equipment is expected to have a salvage value of \$800,000 at the end of the project’s life in four years and the firm expects all of its investment in net working capital [NWC) to be returned. If the firm’s tax rate is 40%, what is the project's total terminal cash flow? Temmm CF: Sam/nae w—xwu’: U—T) + ANWC : 1\$800000 (1 ~04) + \$403,000 = “480.000 + “£100,000 ‘ 6003.000 6. Project Analysis: NPV and [RR Again, consider Hallmere Inc., which purchased \$4,500,000 worth of equipment that required \$500,000 in shipping and installation costs. In addition, the ﬁrm’s accounts receivable and inventories increased by \$900,000 and its spontaneous liabilities increased by \$500,000. Hallmere's {-0 net annual sales revenue is expected to be \$7,500,000 at the end of each of the next four years, and total operating costs (fixed and variable costs excluding depreciation) will be \$4,300,000. Assume that the ﬁrm uses the straight—line depreciation method to depreciate the equipment and the ﬁrm's tax rate is 40%. The equipment is expected to have a salvage value of \$800,000 at the end of the project’s life in four years, and the firm expects all of its investment in net working capital (NWC) to be returned. If its required rate of return is 12%, what is the project’s net present value (NPV) and internal rate of return (IRR)? T J? 2 3 4 Total Investment Outlay "slqoolooo \$ .\$ -1 Operating Cash Flow 2! 4201000 2! 4201000 2(‘1‘ZOIDOO Total Terminal Cash Flow M EFF-1E Plus E SW: 8?: 2 «0,400,000 2&3“ 00' s F01 = 5 ‘_ . Co; a 330qu 2,420,000 + 800, 000) g - Should Hallmere accept the project? 172655 l2?— 3 OPT l Kg: gl ' ﬂ NPV: “2506104453 >0 000571”. ...
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## This note was uploaded on 05/18/2012 for the course FIN 3113 taught by Professor Titus-piersma during the Spring '08 term at Oklahoma State.

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Chapter 10 Aplia Problems with Solutions - CHAPTER 10 —...

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