Problem Information Net cash inflows year 0 initial investment outlay 15000000

# Problem information net cash inflows year 0 initial

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Problem Information Net cash inflows: year 0 (initial investment outlay) (\$15,000,000) year 1 \$0 year 2 \$1,000,000 year 3 \$1,000,000 year 4 \$2,500,000 year 5 \$3,000,000 year 6 \$3,000,000 year 7 \$3,000,000 year 8 \$3,000,000 year 9 \$3,000,000 year 10 \$3,000,000 Lease agreement expires (end of year) 10 Cost of capital 12% PV annuity factor, 6 years, 12% 4.111 (from Append Requirements Compute the net present value and the IRR for this venture. What is the

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for this investment, i.e., the price that would yield a NPV of \$0? Use the determine the break-even selling price. Solution 1. NPV of proposed investment: PV of future cash flows: Year CF 1 \$0 2 \$1,000,000 3 \$1,000,000 4 \$2,500,000 Years 5-10 \$3,000,000 Less: Initial investment outlay, y NPV = Alternatively, NPV = (\$4,063,610) (difference is d the above cal Internal Rate of Return (IRR) = 6.43% 2. The maximum purchase price the seller would be willing to offer, given indicated cash flows, would be slightly less than \$11,000,00, as follows First, reproduce portion of the spreadsheet (above) that contains Cash year 0 (initial investment outlay) (\$15,000,000) year 1 \$0 year 2 \$1,000,000 year 3 \$1,000,000 year 4 \$2,500,000 year 5 \$3,000,000 year 6 \$3,000,000 year 7 \$3,000,000 year 8 \$3,000,000 year 9 \$3,000,000 year 10 \$3,000,000
Second, use Goal Seek to determine the maximum selling price, as fo year 0 (initial investment outlay) (\$10,936,390) year 1 \$0 year 2 \$1,000,000 year 3 \$1,000,000 year 4 \$2,500,000 year 5 \$3,000,000 year 6 \$3,000,000 year 7 \$3,000,000 year 8 \$3,000,000 year 9 \$3,000,000 year 10 \$3,000,000 NPV = \$0 IRR = 12.00%

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s se, be of lays each of through 0, and all cash . dix C, Table 2) e break-even selling price
Goal Seek function in Excel to PV factor PV 0.8928571429 \$0 0.7971938776 \$797,194 0.7117802478 \$711,780 0.6355180784 \$1,588,795 2.6126148203 \$7,837,844 \$10,935,614 year 0 = (\$15,000,000) (\$4,064,386) due to rounding of PV factors in lculation) n a discount rate of 12% and the s: h Flow information:

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ollows:
Exercise 12-42: Asset-Replacement Decision; NPV Analysis Background Data Current net book value (NBV) of asset A Estimated salvage value of asset A, end of useful life Additional life (in years) of asset A Current disposal value, asset A Disposal value at end of three years, asset A Purchase price, asset B Estimated salvage value of asset B, end of useful life Useful life of asset B (in years) Pre-tax cash operating cost savings (per year) Combined (federal plus state) income tax rate Weighted-average cost of capital (after-tax discount rate) Required 1. Determine the relevant (i.e., differential) cash flows (after tax) at each of decision: (1) project initiation (i.e., time period 0); (2) project operation (i. of year 3). 2. Using the net present value (NPV) decision model, should the company 3. What is the weighted-average cost of capital (WACC) that would make th

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Solution 1. Relevant after-tax cash flows: At project initiation (i.e., time period 0) NBV of existing asset, A Current disposal value of asset A Gain (Loss) on disposal Tax effect of sale of existing asset (@40%) Net outlay, asset B: Gross cost, asset B Plus/minus tax effect, sale of asset A Net investment outlay, asset B At project operation (i.e., each of years 1, 2, and 3): A Annual depreciation deduction \$100,000 Annual tax benefit/savings (@40%) \$40,000 Differential tax savings, assuming asset replacement Annual pre-tax cost savings under asset B Less: increased tax on realized cost savings (@ 40%) Annual after-tax cost savings, assuming asset replacement Annual after-tax cash inflow, under replacement decision
• Spring '18

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