84 New project NPV Answer a Diff M 0 r 15 1 2 3 Purchase 50000 Sales 50000

84 new project npv answer a diff m 0 r 15 1 2 3

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84 . New project NPV Answer: a Diff: M 0 r = 15% 1 2 3
Purchase -50,000 Sales 50,000 50,000 50,000 - VC -20,000 -20,000 -20,000 - Deprec. -40,000 -5,000 -5,000 EBT -10,000 25,000 25,000 - Taxes +4,000 -10,000 -10,000 Net income -6,000 15,000 15,000 + Depreciation +40,000 +5,000 +5,000 34,000 20,000 20,000 NWC -12,000 +12,000 RV(AT) _______ _______ _______ +6,000 NCF -62,000 34,000 20,000 38,000 NPV 15% = $7,673.71. 85 . Risk-adjusted discount rate Answer: b Diff: M Time lines: Project A 0 r = 12% 1 2 3 4 5 6 | | | | | | | CFs A -15,000 4,000 4,000 4,000 4,000 4,000 4,000 NPV A = ? = 3,978.60 5,000 Salvage value Terminal CF = 9,000 Project B 0 r = ? 1 2 6 Years | | | ... | CFs B -14,815 5,100 5,100 5,100 NPV B = NPV A = 3,978.60 0 Salvage value Terminal CF = 5,100 Financial calculator solution: A: Inputs: CF 0 = -15,000; CF 1 = 4,000; N j = 5; CF 2 = 9,000; I = 12. Output: NPV = $3,978.78. B: Inputs: CF 0 = -18,793.78; CF 1 = 5,100; N j = 6. Output: IRR = 15.997% 16%. 86 . New project IRR Answer: b Diff: T Time line: 0 IRR = ? 1 2 3 4 5 6 Years -100,000 17,300 22,100 16,900 14,100 13,700 11,700 NPV = ? Depreciation cash flows: MACRS Depreciable Annual Year Percent Basis Depreciation 1 0.20 $100,000 $20,000 2 0.32 100,000 32,000 3 0.19 100,000 19,000
4 0.12 100,000 12,000 5 0.11 100,000 11,000 6 0.06 100,000 6,000 $100,000 Project analysis worksheet: Year: 0 1 2 3 4 5 6 I Initial outlay 1) Machine cost ($100,000) 2) Decrease in NWC -- 3) Total net inv. ($100,000 ) II Operating cash flows 4) Inc. in before tax & deprec. Earnings $15,500 $15,500 $15,500 $15,500 $15,500 $15,500 5) After-tax inc. in revenues 9,300 9,300 9,300 9,300 9,300 9,300 6) Deprec. (from table) 20,000 32,000 19,000 12,000 11,000 6,000 7) Tax savings deprec. (line 6 × 0.4) 8,000 12,800 7,600 4,800 4,400 2,400 8) Net operating CFs (line 5 + 7) $17,300 $22,100 $16,900 $14,100 $13,700 $11,700 III Terminal year CFs 9) Estimated salvage value 0 10) Tax on salvage value 0 11) Return of NWC 0 12) Total termination CFs 0 IV Net CFs 13) Total Net CFs ($100,000 )$17,300 $22,100 $16,900 $14,100 $13,700 $11,700 Financial calculator solution: Inputs: CF 0 = -100,000; CF 1 = 17,300; CF 2 = 22,100; CF 3 = 16,900; CF 4 = 14,100; CF 5 = 13,700; CF 6 = 11,700. Output: IRR = -1.32% 87 . Risk-adjusted discount rate Answer: e Diff: T Time lines: Project A 0 r = 12% 1 2 3 4 Years | | | | | CFs A -25,000 13,000 13,000 13,000 13,000 NPV A = ? = 17,663 Terminal value = 5,000 CF 4 = 18,000 Project B 0 r = ? 1 2 3 4 Years | | | | | CFs B -25,000 15,247 15,247 15,247 15,247 NPV A = NPV B = 17,663 Terminal value = 0 CF 4 = 15,247 Financial calculator solution: A: Inputs: CF 0 = -25,000; CF 1 = 13,000; N j = 3; CF 2 = 18,000; I = 12. Output: NPV A = 17,663.13. B: Inputs: CF 0 = -42,663.13; CF 1 = 15,247; N j = 4. Output: IRR = 16.0% = r.

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