*Annuity discounted at 13%; number of years = project life.
†
Investment − PV(depreciation tax shield).
The present value of the depreciation tax shield for each alternative is computed as follows:
The equivalent annual cost (EAC) for each alternative is computed as follows:
b.
Since the operating costs are the same, then Quick & Dirty is preferred because it has the lower
EAC.
The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $30. The
unit cost of the giftware is $10.
Year
Unit Sales
1
39,000
2
47,000
3
16,000
4
9,000
Thereafter
0
It is expected that net working capital will amount to 30% of sales in the following year. For
example, the store will need an initial (year-0) investment in working capital of .30 × 39,000 ×
$30 = $351,000. Plant and equipment necessary to establish the Giftware business will require
an additional investment of $217,000. This investment will be depreciated using MACRS and a
3-year life. After 4 years, the equipment will have an economic and book value of zero. The
firm’s tax rate is 30%. What is the net present value of the project? The discount rate is 10%.
(Do not round intermediate calculations. Round your answer to the nearest dollar
amount.)
Net present value
$
rev: 05_12_2012
Explanation:
Some values below may show as rounded for display purposes, though unrounded numbers

should be used for the actual calculations.
All figures in thousands
0
1
2
3
4
Net
worki
ng
capita
l
$ 351
$423
$ 144
$
81
$
0
Inve
stmen
t in
NWC
351
72
−279
−63
−81
Inve
stmen
t in
plant
&
equip
ment
217
0
0
0
0
Cash
flow
from
invest
ment
activit
y
$
−568
$−72
$
+279
$ +63
$ +81
All figures in thousands
0
1
2
3
4
Reven
ue
$
1,170.0
0
$
1,410.0
0
$
480.00
$
270.00
Cost
390.00
470.00 160.00
90.00
Depre
ciation
72.30
96.50 32.10
16.08
Pretax
profit
707.67
843.54 287.86
163.92
Taxes
212.30
253.06 86.36
49.18
Net
income
495.37
590.48 201.50
114.74

Depre
ciation
72.33
96.46 32.14
16.08
Operat
ing cash
flow
$567.70
$686.94
$
233.64
$
130.82
Total
cash
flow
$−568
$495.70
$965.94
$
296.64
$
211.82
NPV = −$568 +
$495.70
+
$965.94
+
$296.64
+
$211.82
= $1,048.480, or
$1,048,477
1.10
1.10
2
1.10
3
1.10
4
Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $1.3 million. The
lathe will cost $48,000 per year to run, but will save the firm $141,000 in labor costs, and will
be useful for 10 years. Suppose that for tax purposes, the lathe will be depreciated on a straight-
line basis over its 10-year life to a salvage value of $370,000. The actual market value of the
lathe at that time also will be $370,000. The discount rate is 8%, and the corporate tax rate is
35%. What is the NPV of buying the new lathe?
(Negative amount should be indicated by a
minus sign. Enter your answer in dollars not in millions. Do not round intermediate
calculations. Round your answer to 2 decimal places.)
NPV
$
Explanation:
All figures are on an incremental basis:
Labor
savings
$
141,000
−Operating
cost
48,000
−Depreciati
on
93,000
EBIT
0
−Taxes
0
Net income
0
+Depreciati
on
93,000

Operating
cash flow
$
93,000
NPV = −$1,300,000 + [$93,000 × annuity factor (8%, 10 years)] + [$370,000/(1.08)
10
]
In a slow year, Deutsche Burgers will produce 2.9 million hamburgers at a total cost of $5.4
million. In a good year, it can produce 5.4 million hamburgers at a total cost of $6.1 million.

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