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))
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) :
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)
• Spring '18

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