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10-1B.
(a) Tax payments associated with the sale for $45,000:
Recapture of depreciation
= ($45,000-$20,000) (0.34) = $8,500
(b) Tax payments associated with sale for $40,000:
Recapture of depreciation
= ($40,000-$20,000) (0.34) = $6,800
(c) No taxes, because the machine would have been sold for its book value.
(d) Tax savings from sale below book value:
Tax savings
= ($20,000-$17,000) (0.34) = $1,020
10-2B.
New Sales $100,000,000
Less: Sales taken from
existing product lines - 40,000,000
$60,000,000
10-3B.
Change in net working capital equals the increase in accounts receivable and inventory less the increase in accounts payable = $34,000 + $80,000 - $50,000 = $64,000.
The change in taxes will be EBIT X marginal tax rate = $775,000 X.34 = $263,500.
A project’s free cash flows =
Change in earnings before interest and taxes
- change in taxes
+ change in depreciation
- change in net working capital
- change in capital spending
= $775,000
- $263,500
+ $200,000
- $64,000
- $0
= $647,500
10-4B.
Change in net working capital equals the decrease in accounts receivable, the increase in inventory less the increase in accounts payable = -$10,000 + $15,000 - $36,000 = -$31,000.
The change in taxes will be EBIT X marginal tax rate = $300,000 X.34 = $102,000.
A project’s free cash flows =
Change in earnings before interest and taxes
- change in taxes
+ change in depreciation
- change in net working capital
- change in capital spending
= $300,000
- $102,000
+ $50,000
- ($31,000)
- $0
= $279,000
10-5B.
(a) Initial Outlay
Outflows:
Purchase price $ 250,000
Installation Fee 10,000
Increased Working Capital Inventory 15,000
Net Initial Outlay $275,000
(b) Differential annual free cash flows (years 1-9)
A project’s free cash flows =
Change in earnings before interest and taxes
- change in taxes
+ change in depreciation
- change in net working capital
- change in capital spending
= $70,000
- $23,800
+ $26,000*
- $0
- $0
= $72,200
*Annual Depreciation on the new machine is calculated by taking the purchase price ($250,000) and adding in costs necessary to get the new machine in operating order (the installation fee of $10,000) and dividing by the expected life.
(c) Terminal Free Cash flow (year 10)
Inflows:
Differential free cash flow in year 10 $72,200
Recapture of working capital (inventory) 15,000
Total terminal cash flow $87,200
(d) NPV = $72,200 (PVIFA15%,9 yr.) + $87,200 (PVIF15%, 10 yr.)
- $275,000
= $72,200 (4.772) + $87,200 (.247) - $275,000
= $344,538.40 + $21,538.40 - $275,000
= $91,076.80
Yes, the NPV > 0.
10-6B.
(a) Initial Outlay
Outflows:
Purchase price $ 1,000,000
Installation Fee 50,000
Training Session Fee 100,000
Increased Inventory 150,000
Net Initial Outlay $ 1,300,000
(b) Differential annual free cash flows (years 1-9)
A project’s free cash flows =
Change in earnings before interest and taxes
- change in taxes
+ change in depreciation
- change in net working capital
- change in capital spending
= $400,000
- $136,000
+ $105,000*
- $0
- $0
= $369,000
*Annual Depreciation on the new machine is calculated by taking the purchase price ($1,000,000) and adding in costs necessary to get the new machine in operating order (the installation fee of $50,000) and dividing by the expected life.
(c) Terminal Free Cash flow (year 10)
Inflows:
Differential flow in year 10 $369,000
Recapture of working capital (inventory) 150,000
Total terminal cash flow $519,000
(d) NPV = $369,000 (PVIFA12%,9 yr.) + $519,000 (PVIF12%, 10 yr.)
- $1,300,000
= $369,000 (5.328) + $519,000 (.322) - $1,300,000
= $1,966,032 + $167,118 - $1,300,000
= $833,150
Yes, the NPV > 0.
10-7B. (a) Initial Outlay
Outflows:
Purchase price $ 100,000
Installation Fee 5,000
Training Session Fee 5,000
Increased Inventory 25,000
Net Initial Outlay $ 135,000
(b) Differential annual free cash flows (years 1-9)
A project’s free cash flows =
Change in earnings before interest and taxes
- change in taxes
+ change in depreciation
- change in net working capital
- change in capital spending
= $25,000
- $8,500
+ $10,500*
- $0
- $0
= $27,000
*Annual Depreciation on the new machine is calculated by taking the purchase price ($100,000) and adding in costs necessary to get the new machine in operating order (the installation fee of $5,000) and dividing by the expected life.
(c) Terminal Free Cash flow (year 10)
Inflows:
Differential flow in year 10 $27,000
Recapture of working capital (inventory) 25,000
Total terminal cash flow $52,000
(d) NPV = $27,000 (PVIFA12%,9 yr.) + $52,000 (PVIF12%, 10 yr.)
- $135,000
= $27,000 (5.328) + $52,000 (.322) - $135,000
= $143,856 + $16,744 - $135,000
= $25,600
Yes, the NPV > 0.
10-8B
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| SOLUTION TO INTEGRATIVE PROBLEMS | | | Section IV. Calculate Free Cash Flow (using information calculated in Sections II and III, in addition to the Change in Capital Spending). |