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Solutions to Problem Set B. (a) Tax payments associated with the sale for $45,000:

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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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Читайте в этой же книге: CHAPTER OUTLINE | END-OF-CHAPTER QUESTIONS | END-OF-CHAPTER PROBLEMS | SOLUTION TO INTEGRATIVE PROBLEM | CHAPTER OUTLINE | END-OF-CHAPTER QUESTIONS | Solutions to Problem Set A | Section I. Calculate the change in EBIT, Taxes, and Depreciation (this becomes an input in the calculation of Operating Cash Flow in Section II). | Section IV. Calculate Free Cash Flow (using information calculated in Sections II and III, in addition to the Change in Capital Spending). | CHAPTER OUTLINE |
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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).

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