Solution See above 2 Repeat the procedure using a discount rate WACC of 10 and

Solution see above 2 repeat the procedure using a

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Solution See above. 2. Repeat the procedure using a discount rate (WACC) of 10% and the cash flo be $1,903.59; remember to use the Name Manager under the Formulas tab
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Value note. : ctl+shift+enter) +$B$9)^Y)) +WACC)^Y)) : ctl+shift+enter) ows)/((1+$B$22)^Yr)) ows)/((1+WACC)^Yr))
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enced investment project. Consult the xample, define cell B9 as "WACC," cells A12 e estimated NPV of this project: ay formula): control+shift+enter. Cell B18 should ows listed above. ( Hints : the NPV should b in Excel 2010.)
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Problem Information Project A: Cost $5,000 Annual After-tax Cash Inflow $1,800 Life (Years) 5 Project B: Cost $5,000 After-tax Cash Inflow, Yr. 1 $500 After-tax Cash Inflow, Yr. 2 $1,200 After-tax Cash Inflow, Yr. 3 $2,000 After-tax Cash Inflow, Yr. 4 $2,500 After-tax Cash Inflow, Yr. 5 $2,000 Project C: Cost $5,000 Net cash inflow per year $2,500 Life (Years) 5 Income-tax rate 25% Project D: Cost $5,000 Sales, per year $4,000 Cash expenditures, per year $1,500 Estimated Salvage Value $500 Income-tax rate 25% Project life (in years) 5 Minimum rate of return on investment 8% after-tax Annuity Factor, 4 years = 3.312 (from Appendix C, Table 2) Annuity Factor, 5 years = 3.993 (from Appendix C, Table 2) Yr 1 = 0.926 Yr 2 = 0.857 Yr 3 = 0.794 Yr 4 = 0.735 Yr 5 = 0.681 Solution a. Project A Payback Period = 2.78 years b. Project B Payback Period: After-tax Cumulative Year Cash Inflows After-tax Inflows 1 $500 $500 2 $1,200 $1,700 3 $2,000 $3,700 4 $2,500 $6,200 Payback Period = 3.52 years PV Factors (from Appendix C, Table 1) :
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Exercise 12-38: Straightforward Capital Budgeting with Taxes; Sensitivity Analysis Background Data Cost of new machine $ 30,600 Machine's estimated useful life 6 Estimated salvage value $ 600 Annual cost savings $ 8,000 Cost of capital 8% Income tax rate 40% Net after-tax annual cash inflow (Parts 2, 3, and 4) $ 5,000 0.630 4.623 Required Soution 1) $ 5,000 $ 3,000 Tax rate 40% Income taxes $ 1,200 $ 6,800 2) 6.12 Assumed after-tax annual net cash flow = $ 5,000 Note: if cash flows are assumed to occur at end of year, then the appropriate answer would be 7 years. 3) $ 23,115 378 Total $ 23,493 Initial investment 30,600 NPV $ (7,107) or, NPV = $ (7,107.50) PV factor, 8%, 6 years (from Appedix C, Table 1) = Annuity factor, 8%, 6 years (from Appendix C, Table 2) = Depreciation per year ($30,600 $600) ÷ 6 years Taxable income ($8,000 $5,000) Net after-tax annual cash inflow ($8,000 $1,200) Payback period in years ($30,600 ÷ $5,000/year) PV of annual savings ($5,000 × 4.623) PV of salvage value ($600 × 0.630)
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Exercise 12-39: Capital Budgeting with Tax (non-MACRS depreciation) and Sensitivity Analysis Background Data Cost of new machine $ 6,000 Expected useful life 10 Additional cash revenues per year $ 1,200 Income tax rate 35% PV Annuity Factor, 15%, 10 years (from Appendix C, Table 2) 5.019 Required Solution Annual after-tax net cash inflow: $ 780 Tax savings on depreciation expense (($6,000 ÷ 10 years) × 0.35) 210 Net after-tax cash inflow $ 990 1) 6.06 2)Book (accounting) rate of return on initial investment: Operating income in each of the next 10 years: Sales $ 1,200 Depreciation 600 Operating income before taxes $ 600 Taxes 210 Operating income $ 390 Book (accounting) rate of return (based on initial investment outlay) = 6.5% 3) $ 4,969 4) $ 1,195 Tax savings on depreciation expense 210 $ 985 $ 1,516 5)NPVs, alternative assumptions: After-tax cash revenue ($1,200 × (1 0.35)) Payback period, in years ($6,000 ÷ $990/year) Maximum investment, given desire to earn minimum IRR of 15% ($990/year × 5.019)
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