STUDENT SOLUTIONS MANUAL

CHAPTER 20: CAPITAL BUDGETING

EXERCISES
20-34 Basic Capital Bu!"ti#! T"c$#i%u"s &4' (i#)
a. Project A:
Or, 2 years and 10 months
b. Project B:
After-tax Cumulat!e
Year Cash Inflows After-tax Cash Inflows
1 " #00 " #00
2 1,200 1,$00
% 2,000 %,$00
& 2,#00
Or, % years and $ months
c. Project C:
'e(recaton ex(ense (er year: "#,000 ) # * "1,000
+axable ncome each year: "2,#00 , "1,000 * "1,#00
-ncome taxes each year: "1,#00 x 2#. * "%$#
Annual after-tax net cash nflo/: "2,#00 , "%$# * "2,12#

Or, 2 years and # months
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-1 The McGraw-Hill Companies, 2008
years 2.$0
"1,000
"#,000
Perod Paybac1 = =
years %.#2
"2,#00
"%,$002 3"#,000
% Perod Paybac1 =

+ =
years 2.%#
"2,12#
"#,000
Perod Paybac1 = =
STUDENT SOLUTIONS MANUAL
20-34 3Contnued2
d. Project ':
312 'e(recaton ex(ense (er year: 3"#,000 , "#002 ) # * "400
+axable ncome:
5ales "&,000
6x(enses:
Cash ex(endtures "1,#00
'e(recaton 400 2,&00
O(eratn7 ncome before taxes "1,800
-ncome taxes 32#.2 &00
O(eratn7 ncome after taxes "1,200
Boo1 rate of return * "1,200 "#,000 * 24*00+
322 A!era7e boo1 !alue * 3"#,000 9 "#002 2 * "2,$#0
Boo1 rate of return * "1,200 "2,$#0 * 43*,4+
e. :et Present ;alues 3<0.2, rounded:
Project A: 3"1,000 x %.44%2 , "#,000 *
"$,10$ , "#,000 * -2./01
Project B:
After-tax 8% Discount Present
Year Cash Flows Factor Values
0 ="#,000>
1 " #00 0.428 &8%
2 1,200 0.0#$ 1,020
% 2,000 0.$4& 1,#00
& 2,#00 0.$%# 1,0%0
# 2,000 0.801 1,%82
:et Present ;alue 3:P;2 * -/.212
Project C: 3"2,12# x %.44%2 , "#,000 *
"0,&0# , "#,000 * -3.40'
Project ':
Present !alue of cash nflo/s:
?ears 1 throu7h & 3"1,200 9 "4002 x %.%12 * "8,4##
?ear # 3"2,100 9 "#002 x 0.801 * 1,$$1
Present !alue of cash nflo/s * "0,$28
-ntal n!estment * #,000
N"t p3"s"#t 4alu" &NP5) 6 "%,$28
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-2 The McGraw-Hill Companies, 2008
STUDENT SOLUTIONS MANUAL
20-3, 7utu3" a# P3"s"#t 5alu"s Usi#! E8c"l &20 (i#)
A. +o calculate future !alues, use the follo/n7 6xcel functon:
@;3rate,n(er,(mt,(!,ty(e2
1. Bet/een Aanuary 1, 1$01 and 'ecember %1, 200$ there are 81& sx-
month (erods 3n(er2. +hus, at the end of year 200$, at an annual nterest
rate of 8. com(ounded semannually, the "2&.00 /ll ha!e 7ro/n to
-/.022.22'.341, as follo/s:
@;30.08B2,81&,0,-2&,02
2. @;30.00B2,81&,0,-2&,02 * --,02.133.020.2'3
%. a. @;30.08B&,1220,0,-2&,02 * -2.02/.1',.403
b. @;30.00B&,1220,0,-2&,02 * -013.4/0.0''./,3
&. @;30.00B2,12,0,-4#00000000,02 * -/'.202.00,.01,
B. +o calculate (resent !alues, use the follo/n7 6xcel functon:
P;3rate,n(er,(mt,f!,ty(e2
1. @or a stream of ten 3102 end-of-year (ayments of "2#,200,000 3ordnary
annuty2 and a dscount rate of 12., /e ha!e:
P;30.12,10,-2#200000,0,02 * -/42.30'.,20
2. -f the frst (ayment s rece!ed the day the contract s ass7ned 3annuty due2,
/e ha!e:
P;30.12,10,-2#200000,0,12 * -/'2.41/.02'
%. C!en an ncome-tax rate of &#., the after-tax cost of 312 abo!e s:
P;30.12,10,-2#200000D0.##,0,02 * -10.3/2.02/*/1

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20- The McGraw-Hill Companies 2008
STUDENT SOLUTIONS MANUAL
20-30 Basic Capital Bu!"ti#! T"c$#i%u"s: U#i9:3( N"t cas$ i#9l:;s. N:
I#c:(" Ta8"s. N:#-<ACRS-Bas" D"p3"ciati:# &4' (i#)
a. Enadjusted Paybac1 Perod: As sho/n abo!e, the (aybac1 (erod occurs
bet/een years & and #. Alternat!ely, the (aybac1 (erod * "#00,000
"120,000Byear * 4*/1 ="a3s 3about & years and 2 months2
b. Boo1 3accountn72 rate of return:
As ndcated abo!e, the a!era7e ncrease n net ncome o!er the ten-year
(erod * "$00,000B10 years * "$0,000Byear. +hus, the AFF
312 On ntal n!estment: "$0,000B"#00,000 * /4*00+
322 On a!era7e n!estment:
A!era7e n!estment: 3"#00,000 9 02B2 * "2#0,000
Boo1 rate of return: "$0,000 "2#0,000 * 20*00+
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-! The McGraw-Hill Companies, 2008
STUDENT SOLUTIONS MANUAL
20-30 3Contnued2
c. :P;: usn7 the P; factors from +able 2 3(. 0$12, :P; * -/10./20
Based on the :P; functon of 6xcel, the :P; * -/10.021 3the dfference n
:P; estmates s due to roundn7 that ta1es (lace /hen usn7 the P; factors
(ro!ded n the +able 2 rather than the bult-n :P; functon2
d. Present !alue (aybac1 (erod: as ndcated n the abo!e schedule, the (resent
!alue (aybac1 (erod s >,-plus? ="a3sG ths s the tme t ta1es for the (resent
!alue of future cash nflo/s to co!er the or7nal n!estment outlay of "#00,000

e. -nternal rate of return: as ndcated n the abo!e schedule, /e can use the
bult-n functon n 6xcel to estmate the -FF for ths (ro(osed n!estmentG -FF
* 20*/0+
Alternat!ely, /e can estmate the -FF as follo/s. He are loo1n7 for an
nterestBdscount rate that (ro!des for a :P; * "0 3.e., a rate that (ro!des a
(resent !alue of future cash nflo/s eIual n amount to the or7nal n!estment
outlay, "#00,0002. +hus,
P; of net cash nflo/s:
At 20. 3.e., a rate too low2: "120,000 x &.142 * "#0%,0&0
At 2#. 3.e., a rate too high2: "120,000 x %.#$1 * &20,#20
'fference n P; /th #. dfference n dscount rate * " $&,#20


Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-" The McGraw-Hill Companies 2008
20.20. * #.
"$&,#20
#00,000 " - "#0%,0&0
9 20. * -FF
months2 2 years, 38 years 8.12 *
"#&,2&0
"8,#80
9 years 8
STUDENT SOLUTIONS MANUAL
20-40 Basic Capital Bu!"ti#! T"c$#i%u"s: U#"4"# N"t Cas$ I#9l:;s. I#c:(" Ta8"s. a# <ACRS D"p3"ciati:#
&,0 (i#)
1. Paybac1 (erod: as sho/n by the abo!e schedule, the (aybac1 (erod s bet/een & and # years. Esn7 a lnear
nter(olaton, /e estmate the (aybac1 (erod as
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-2# The McGraw-Hill Companies 2008
years &.%% *
"10#,200
"80,420
9 years & * Perod Paybac1
STUDENT SOLUTIONS MANUAL
20-40 3Contnued2
2. Boo1 rate of return 3AFF2:
A!era7e after-tax o(eratn7 ncomeByear: "012,000B10 * -0/.200
Boo1 3accountn72 rate of return 3AFF2:
a. On ntal n!estment: "01,200B"#00,000 * /,*24+
b. On a!era7e n!estment:
Com(utaton of 5m(le A!era7e Annual -n!estment:
A!era7e n!estment: "1,1&4,200B10 * "11&,420
Boo1 rate of return 3AFF2: "01,200B"11&,420 * 10*,,+
%. :et Present ;alue 3:P;2: as ndcated n the abo!e schedule, the :P; of the
(ro(osed n!estment s -222.02/ 3based on P; factors from +able 1, (. 0$02.
Based on the bult-n :P; functon n 6xcel, the estmated :P; s -222.143. +he
dfference n estmates s due to the roundn7 that s emboded n the P; factors
ta1en from +able 1.
&. -nternal Fate of Feturn 3-FF2: as ndcated n the abo!e schedule, /e can use the
bult-n functon n 6xcel to estmate the -FF for ths (ro(osed n!estmentG -FF *
2/*4,+* Alternat!ely, /e can use a lnear nter(olaton (rocedure to estmate the
(rojectJs -FF, as follo/s: /e are loo1n7 for an nterestBdscount rate that (roduces a
P; of cash nflo/s eIual to the net or7nal n!estment outlay 3"#00,0002. +hus,
P; of net cash nflo/s at 20. 3a rate that s too lo/2: "#2$,0$#
P; of net cash nflo/s at 22. 3a rate that s too h7h2: "&40,2$%
'fference n P; /th 2. dfference n dscount rate: " %$,802
+hus,
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-2$ The McGraw-Hill Companies, 2008
?ear
Boo1 ;alue,
Be7nnn7-of-
?ear
'e(recaton
6x(ense for
the ?ear
Boo1 ;alue,
6nd-of-?ear
A!era7e B;
'urn7 the
?ear
1 "#00,000 "100,000 "&00,000 "&#0,000
2 &00,000 180,000 2&0,000 %20,000
% 2&0,000 48,000 1&&,000 142,000
& 1&&,000 #$,800 08,&00 11#,200
# 08,&00 #$,800 20,000 #$,800
8 20,000 20,000 0 1&,&00
$ 0 0 0
0 0 0 0
4 0 0 0
10 0 0 0
+otals "#00,000 "1,1&4,200
21.&0. * 2.
"%$,802
"2$,0$#
9 20. * -FF
STUDENT SOLUTIONS MANUAL

20-42 Capital Bu!"ti#! ;it$ Ta8. N:#-<ACRS D"p3"ciati:#. a# S"#siti4it=
A#al=sis &3' (i#)
Annual after-tax net cash nflo/:
Cash re!enue "1,200 x 31 , 0.%#2 * "$00
+ax sa!n7 on de(recaton ex(ense 3"8,000B102 x 0.%# * 210
+otal "440
1. Paybac1 (erod:
2. 6stmated O(eratn7 -ncome (er year:
5ales "1,200
'e(recaton 800
O(eratn7 ncome before taxes " 800
+axes 210
O(eratn7 ncome " %40
+herefore,
%. +he maxmum ntal n!estment s such that the (roject at ths le!el of n!estment
/ould yeld a :P; * "0 3.e., a stuaton /here P; of cash nflo/s * P; of cash
outflo/s2. +he a((ro(rate annuty factor for 10 years, 1#. s #.014. Ket L *
maxmum ntal n!estment, then:
L * "440 x #.014 * -4.2,2
&. FeIured annual 3pre-tax2 cash re!enue:
C!en an ntal n!estment outlay of "8,000, the after-tax
annual cash flo/ needed (er year to 7enerate a return
of 1#. * "8,000B#.014 *
"1,14#
Kess: Annual +ax sa!n7s on de(recaton ex(ense * 210
FeIured after-tax annual cash re!enue "40#
31 , t2 0.8#
Annual 3pre-tax2 cash re!enue needed -/.'/'
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-28 The McGraw-Hill Companies 2008
8.#. *
"8,000
"%40
* return of rate Boo1
years 8.08 *
"440
"8,000
STUDENT SOLUTIONS MANUAL
20-42 3Contnued2
#. :P; Calculatons under dfferent assum(tons re7ardn7 the dscount rate
3reIured rate of return2 and annual after-tax net cash nflo/s. Assume a ten-year
lfe and an ntal n!estment outlay of "8,000.
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-2% The McGraw-Hill Companies 2008
'scount P; Annuty Annual :et After-+ax Cash @lo/
Fate @actor "#00 "1,000 "2,000
10. 8.1&# 3"2,4202 "1&# "8,240
1#. #.014 3"%,&412 3"4012 "&,0%0
20. &.142 3"%,40&2 3"1,0002 "2,%0&
STUDENT SOLUTIONS MANUAL
PR@BLE<S
20-44 E%uip("#t R"plac"("#t D"cisi:#A St3at"!= &,0 (i#)
/* B 3* P;B
Annuty Present After-tax Cash @lo/s 3000s2
@actor ;alue 0 1 2 % & #
@4"3$aul AccuD3il
O(eratn7 Cost
1
3&0.02 3&0.02 3%0.&2 3%0.&2 3%0.&2
O!erhaul cost 3100.02
+ax sa!n7s on de(rec.
2
&.0
18.0 18.0 18.0
Other 6x(enses
%
3#$ .02 3#$ .02 3#$ .02 3#$ .02 3#$ .02
:et after-tax cash flo/s:
?ear 1 0.04% 3"40,14%2 3101.02
?ear 2 0.$4$ 3180,14$2 3201.02
?ear % 0.$12 3 #8,#%%2 3$4.&2
?ear & 0.8%8 3 #0,&402 3$4.&2
?ear # 0.#8$ 3 &#,020 2 3$4.&2
+otal P; &-402.44/ )
Bu= R:C:D3il /0/0D
:et 6Iu(. Purchase
&
1.000 3"2&0,0002 32&0.02
O(eratn7 Cost
#
%.80# 308,#202 32&.02 32&.02 32&.02 32&.02 32&.02
+ax sa!n7s on de(r.
8
%.80# 84,218 14.2 14.2 14.2 14.2 14.2

Other ex(enses
$
%.80# 3110,48#2 3%%.02 3%%.02 3%%.02 3%%.02 3%%.02
5al!a7e !alue
0
0.#8$ 1$,010 %0.0
+otal P; &-3'2.2'2 )
P; dfference n cash flo/ bet/een alternat!es* "&02,&&1 , "%#4,2#4 * -43./02 n fa!or of Fobo'rl
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-1 The McGraw-Hill Companies, 2008
STUDENT SOLUTIONS MANUAL
20-44 3Contnued-12
N@TES
1
?ears 1 and 2: "10 (er hour x 0,000 hours x 31 , t2 * "&0,000
?ears %, &, and #: "&0,000 x 31 , 20.2 * "%0,&00
2
?ears 1 and 2:
'e(recaton ex(ense (er year 35K bass2:
3"120,000 , "20,0002 10 * "10,000
-ncome +ax Fate 3t2 x 0.&0
+ax sa!n7s on de(recaton, ?ears 1 and 2 " &,000
?ears %, &, and #:
Boo1 !alue before o!erhaul 3end of or7nal useful lfe2 " 20,000
O!erhaul cost, ?ear % 100,000
+otal amount to be de(recated "120,000
:umber of years %
'e(recaton ex(ense (er year " &0,000
-ncome +ax Fate 3t2 x &0.
+ax sa!n7s on de(recaton, ?ears %, &, and # " 18,000
%
"4#,000 x 31 , t2 * "4#,000 x 0.80 * "#$,000
&
Purchase (rce "2#0,000
-nstallaton, testn7, rearran7ement, and trann7 9 %0,000
5ubtotal "200,000
+rade-n allo/ance for Accu'rl , &0,000
:et (urchase cost "2&0,000
#
3"10Bhour x &,000 hours2 x 31 , t2 * "&0,000 x 0.80 * "2&,000
8
'e(recaton ex(ense (er year: "2&0,000 # ?ears * "&0,000
-ncome +ax Fate 3t2 x 0.&0
Annual +ax sa!n7s on de(recaton deducton "14,200
$
"##,000 x 31 , t2 * "##,000 x 0.80 * "%%,000
0
3"#0,000 - "02 x 31 , t2 * "#0,000 x 0.80 * "%0,000
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20- The McGraw-Hill Companies, 2008
STUDENT SOLUTIONS MANUAL
20-44 3Contnued-22
2. :et After-tax Cash @lo/s 'fference n Cumulat!e
?ear Accu'rl Fobo'rl Cash @lo/s 'fference
0 "0 3"2&0,0002 3"2&0,0002 3"2&0,0002
1 3"101,0002 3"%$,0002 "8%,200 3"1$8,0002
2 3"201,0002 3"%$,0002 "18%,200 3"1%,8002
% 3"$4,&002 3"%$,0002 "&1,800
+hus, the (aybac1 (erod for n!estn7 n the ne/ machne s 2-(lus years. Esn7 a
lnear nter(olaton method, /e estmate the (aybac1 (erod as:
&. Amon7 other factors that the frm should consder before the fnal decson are:
Chan7es n technolo7y for eIu(ment
Chan7es n mar1et, es(ecally demand for the (roduct and com(ettors
Felablty of the ne/ machne and the ex(ected effects of o!erhaul
Felablty of Accu'rl and accuracy of the estmates 7!en
Com(ett!e strate7y of the frm
'fferences n (roduct Iualtes manufactured by the t/o machnes
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-! The McGraw-Hill Companies 2008
years 2.%% *
"&1,800
"1%,800
9 years 2 * (erod Paybac1
STUDENT SOLUTIONS MANUAL
20-4, C:(pa3is:# :9 Capital Bu!"ti#! T"c$#i%u"sA S"#siti4it= A#al=sis &'0
(i#)
1. 6ffects of the ne/ eIu(ment on o(eratn7 ncome after tax:
5ales "14# x 10,000 * "1,4#0,000
Cost of 7oods sold:
;arable manufacturn7 costs " 40
@xed manufacturn7 costs:
Addtonal fxed manufacturn7 o!erhead:
"2#0,000B10,000 unts * "2#
'e(recaton on ne/ eIu(ment:
3"44#,000 , "14#,0002B& * "200,000Byear
"200,000B10,000 unts (er year * 9 20 9 &#
Manufacturn7 cost (er unt "1%#
+mes: :umber of unts x 10,000
+otal cost of 7oods sold 1,%#0,000
Cross mar7n " 800,000
O(eratn7 6x(enses:
;arable mar1etn7: Cost (er unt " 10
:umber of unts x 10,000 "100,000
Addtonal fxed mar1etn7 cost 9 200,000 %00,000
O(eratn7 ncome before taxes "%00,000
-ncome taxes 3<%0.2 , 40,000
O(eratn7 ncome after tax -2/0.000
+hus, the com(any /ll ncrease ts after-tax o(eratn7 ncome by -2/0.000 each
year.
2. ?ears
1 to % ?ear &
After-tax o(eratn7 ncome "210,000 "210,000
Add: ncreased de(recaton ex(ense 200,000 200,000
After-tax cash nflo/ from ds(osal of eIu(ment 14#,000
+otal cash nflo/ -4/0.000 -,0'.000
+he ne/ machne /ll ncrease cash nflo/s by -4/0.000 n each of the frst three
years and -,0'.000 n ?ear &.
%.
&. A!era7e n!estment * 3"44#,000 9 "14#,0002B2 * "#4#,000
A!era7e after-tax o(eratn7 ncome * "210,000
Boo1 rate of return 3AFF2 based on a!era7e n!estment *
"210,000B"#4#,000 * 3'*22+
20-4, 3Contnued-12
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-" The McGraw-Hill Companies 2008
years 2.&% *
"&10,000
"44#,000
* Perod Paybac1
STUDENT SOLUTIONS MANUAL
#. Esn7 P; and Annuty +ables:
P; of after-tax cash nflo/s 3<1&.2:
?ears 1 throu7h %: "&10,000 x 2.%22 * " 4#2,020
?ear & 3"&10,000 9 "14#,0002: "80#,000 x 0.#42 * %#0,180
+otal (resent !alue future after-tax cash nflo/s *"1,%10,100
Kess: -ntal n!estment outlay 44#,000
:P; of the (ro(osed n!estment - 3/'./00
Esn7 the :P; @uncton n 6xcel:

+hus, the estmated :P; of the n!estment * -3/'.010 3note the roundn7 error
that occurs /hen usn7 the P; and annuty factors2
8. +ral-and-6rror A((roach 3ntal n!estment outlay * "44#,0002:
P; of cash flo/s < 2#.:
3"&10,000 x 1.4#22 9 3"80#,000 x 0.&102 "1,0&0,%$0
P; of cash flo/s < %0.:
3"&10,000 x 1.0182 9 3"80#,000 x 0.%#02 " 4#8,%10
'fference n P; of after-tax cash nflo/s " 42,080
+hus, the estmated -FF for ths n!estment s:
Based on the bult-n functon n 6xcel, the estmated -FF of ths (roject *
21*00+. as follo/s:
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-# The McGraw-Hill Companies 2008
2$.40. * #.
"42,080
"44#,000 - "1,0&0,%$0
9 2#. * -FF
STUDENT SOLUTIONS MANUAL
20-4, 3Contnued-22

$. a. Based on an estmated :P; of "%1#,0$0 3(art #, abo!e2, the P; of any after-tax
ncrease n !arable costs assocated /th unts (roduced by the ne/ machne *
"%1#,0$0. +hus, the annual after-tax ncrease that /ould be (ermssble *
"%1#,0$0B2.41& * "100,128.
+o con!ert ths annual cost to a pre-tax bass, /e /ould ha!e to d!de by the
Iuantty 31 , t2, /here t * the ncome-tax rate 3%0.0.2. +hus, the maxmum
ncrease n pre-tax !arable cost * "100,128B0.$0 * -/'4.4,,.
+herefore, the !arable cost (er unt can ncrease by a maxmum of
"1#&,&88B10,000 unts * -/'*4' (er unt. At ths ncrease, the ne/ eIu(ment
/ould 7enerate a rate of return of exactly 1&.Nts cost of ca(tal.
b. +he maxmum (re-tax decrease n selln7 (rce * "1#&,&88 3see 3a2 abo!e2. On a
(er-unt bass, for all unts sold, the maxmum decrease n unt selln7 (rce s
therefore eIual to -1*12 3rounded2, that s, "1#&,&88B20,000 unts. +hs /ould
re(resent a decrease of a((roxmately 4+ 3"$.$2B"14#.002.
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-$ The McGraw-Hill Companies 2008
STUDENT SOLUTIONS MANUAL
20-40 Capital Bu!"ti#! ;it$ Su(-:9-t$"-E"a3sF-Di!its D"p3"ciati:#A
Sp3"as$""t Applicati:# &2' (i#)
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-8 The McGraw-Hill Companies 2008
STUDENT SOLUTIONS MANUAL
20-'0 D"t"3(i#" I#itial I#4"st("#t Bas" :# I#t"3#al Rat" :9 R"tu3# &/0 (i#)
Ket C be the cost of the machne. +hen,
after-tax cash flo/ (er year x annuty factor for 8 years, 10. * C
O"20,000 , 33"20,000 , CB82 x 0.202P x &.%## * C
O"20,000 , "&,000 9 0.0%%%%CP x &.%## * C
"84,800 9 0.1&#1$C * C
C * "84,800B0.0#&0 * -0/.'/,
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-% The McGraw-Hill Companies 2008
STUDENT SOLUTIONS MANUAL
20-'2 <ac$i#" R"plac"("#t a# S"#siti4it= A#al=sis ;it$:ut Ta8"s
&40 - '0 (i#)
:et addtonal cash outlay for the ne/ machne 3< March #, 20002:
"0,000 , "%,000 * -'.000
1. a. Paybac1 (erod: "#,000B"$#0 * ,*,1 ="a3s
b. Old :e/ 'fference
'e(recaton: 3"#,000 , "8002B11 3"0,000 , "&002B10
* "&00 * "$80 "%80
O(eratn7 ex(ense 3cash2 3"$#02
'fference n annual (re-tax ncome 3reducton n ex(enses2 -320
Koss on trade-n of exstn7 asset 3at March #, 20002 *
boo1 !alue of asset , trade-n !alue * 3"#,000 , "&002 , "%,000
* -/.,00 3ths loss com(lcates the determnaton of AFF, but not
:P; or -FF for the (ro(osed n!estment2
Boo1 !alues: Old :e/
%B#B2000 3"#,000 , "&00 de(rec.2 "&,800 "0,000
%B#B2010 800 &00
A!era7e -n!estment 3Boo1 ;alue2 " 2,800 "&,200
+herefore, the ncremental a!era7e n!estment on the ne/ machne
* "&,200 - "2,800 * -/.,00
+he a!era7e ncremental ncome, including recognition of the loss on disposal of
the
existing machine, s "1%0, as follo/s:
+en-?ear 'fference n Pre-tax -ncome * 10 x "%40 * "%,400
Kess: Koss on ds(osal of exstn7 asset * "&,800 - "%,000 * 3"1,8002
+otal ncome dfference n fa!or of ne/ machne * "2,%00
A!era7e annual ncome dfference * -230
+hus, under the s(ecfed treatment of the loss on ds(osal of the exstn7 machne, the
AFF of the (ro(osed re(lacement decson s sl7htly o!er 1&., as follo/s:
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-!0 The McGraw-Hill Companies 2008
1&.%0. *
"1,800
"2%0
* AFF
STUDENT SOLUTIONS MANUAL
20-'2 3Contnued2
5tudents should be alerted to other (ossble treatments for the loss and to the
fact that ths s a 7ood exam(le of one of the amb7utes assocated /th the
use of the AFF for ca(tal n!estment decson-ma1n7.
c. :P; * 3"$#0 x #.8#02 , 3"0,000 , "%,0002 , O3"800 - "&002 x 0.%22P
* "&,2%$.#0 , "#,000.00 , "8&.&0 * &-02,*20)
d. C!en a ne7at!e :P;, /e 1no/ that the -FF must be less than the dscount
rate 312.2. He are loo1n7 for a dscount rate that (roduces a P; of future
cash nflo/s * "#,000 3net n!estment outlay for the ne/ machne2. He try,
some/hat arbtrarly, $. and 0., as follo/s:
P; of net cash nflo/s at $. * 3"$#0 x $.02&2 , 3"200 x 0.#002 * "#,188
P; of net cash nflo/s at 0. * 3"$#0 x 8.$102 , 3"200 x 0.&8%2 * &,4&0
'fference * " 228
the estmated -FF * 1*13+. as follo/s:
2. :o, because :P; = "0 3:P; s , -02,*202. :ote that the decson based on the
AFF s amb7uous.
%. Because the ex(ected :P; of the (roject s ne7at!e, the frm /ould ha!e to
realQe o(eratn7 cost saings 7reater than those or7nally assumed. Ket the
reIured (re-tax annual sa!n7s * ?. +hen, to ma1e :P; * "0, /e must ha!e:
P; of Cash 5a!n7s * Or7nal -n!estment Outlay
#.8#0? - 3"200 x 0.%222 * "#,000
#.8#0? * "#,08&.&0
? * -02,*3'
3+hat s, the maxmum sa!n7s (er year before the decson not to inest s
chan7ed. +hs re!sed amount re(resents a chan7e of a((roxmately 14.#. abo!e
the current estmate of "$#0. :ote that at annual cash sa!n7s of "048.%#, the -FF
on the (ro(osed n!estment /ould exactly eIual 12., the com(anyJs cost of
ca(tal.2
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-!1 The McGraw-Hill Companies 2008
( ) $.$%. * 1.
228
188
9 $.
STUDENT SOLUTIONS MANUAL
20-'4 Capital Bu!"ti#! ;it$ S"#siti4it= A#al=sis &4' (i#)
1. 6x(ected annual net cash nflo/s 3"800,000 9 "100,0002 * "$00,000
-ncome taxes at %0. * 210,000
After-tax net cash nflo/s * "&40,000
+he buyer s essentally (urchasn7 an e7ht-year stream of after-tax rental
ncomes and ncome-tax sa!n7s assocated /th the de(recaton deducton. +hus,
a ratonal (urchase (rce /ould be the P; of these future cash flo/s, usn7 12. as
the dscount rate. :ote, ho/e!er, that the de(recaton deducton s a functon of
the (urchase (rce, /hch /e are tryn7 to estmate. +herefore, let P denote the
maximum (rce the buyer /ould be /lln7 to (ay. +he amount s a((roxmately "%
mllon, as follo/s:
P * O"&40,000 x A
.12, 0
P 9 O3PB0 x 0.%2 x A
.12, 0
P
P * O"&40,000 x &.480P 9 OPB0 x 0.% x &.480P
P * "2,&%&,%20 9 0.108%P
0.01%$P * "2,&%&,%20
P * -2.22/.,,0
2. @rom MedJs (ers(ect!e, the selln7 (rce should be set such that t /ould co!er
three thn7s: 312 the P; of the after-tax rental ncomes she s fore7on7, 322 ca(tal
7ans taxes she /ould ha!e to (ay on the sale of the real estate, and 3%2 the sales
commsson 3#.2 she has to (ay the real estate bro1er. +hus, f ths s the case,
Ket 5 denote the minimum (rce Med /ould be /lln7 to acce(t
5 * O"&80,000 x A
.10, 0
P 9 O35 , "000,000 , 0.0#52 x 0.&0P 9 0.0#5
5 * O"&80,000 x #.%%#P 9 O0.%05 , "%20,000P 9 0.0#5
5 * "2,&#&,100 9 0.&%5 , "%20,000
0.#$5 * "2,1%&,100
5 * -3.144.03'
%. MACF5 de(recaton ncreases to the buyer the P; of the de(recaton /rte-offs
3com(ared to the use of the 5K method, as n 312 abo!e2. +hus, to the extent the
buyer could realQe these tax sa!n7s, the buyer /ould be /lln7 to (ay a h7her
(rce for the (ro(erty.
As n 312 abo!e, /e re(resent the maxmum (rce the buyer /ould be /lln7 to (ay
as the sum of t/o com(onents: the P; of after-tax rental ncomes 3"2,&%&,%202
(lus the P; of the tax sa!n7s due to the de(recaton deductons o!er the lfe of
the (ro(erty. +hs second com(onent s re(resented as 0.221&%4$P 3/here P
re(resents the (urchase (rce, and therefore de(recable cost, of the (ro(erty2, as
follo/s:
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-!2 The McGraw-Hill Companies 2008
STUDENT SOLUTIONS MANUAL
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-! The McGraw-Hill Companies 2008
STUDENT SOLUTIONS MANUAL
20-'4 3Contnued2
312
MACF5 322 3%2 322 x 3%2
?ear 'e(recaton
1
+ax 6ffect
2
P; @actor Present ;alue
1 0.2000P 0.08000P 0.04% 0.0#%#000P
2 0.%200P 0.04800P 0.$4$ 0.0$8#120P
% 0.1420P 0.0#$80P 0.$12 0.0&10112P
&
%
0.11#2P 0.0%&#8P 0.8%8 0.0214001P
# 0.11#2P 0.0%&#8P 0.#8$ 0.014#4##P
8 0.0#$8P 0.01$20P 0.#0$ 0.000$804P
0 .221&%4$P
:otes:

1
5ee text, 6xhbt 20.8 for MACF5 de(recaton rates, #-year (ro(erty

2
Assumn7 a %0. mar7nal ncome-tax rate.
%
@rst year of s/tchn7 to 5K de(recaton method.
+hus, the maximum amount that a ratonal buyer /ould be /lln7 to (ay has
ncreased to -3./2,.,24, as follo/s:
P * "2,&%&,%20 9 0.221&%4$P
0.$$0#80%P * "2,&%&,%20
& ' $3,126,694 (an increase o) *1",02# o+er the amount calculate, a-o+e
in (1..
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-!! The McGraw-Hill Companies 2008
STUDENT SOLUTIONS MANUAL
20-', <ac$i#" R"plac"("#t ;it$ Ta8 C:#si"3ati:#s &30 - 4' (i#)
Present ;alue of C:sts /th the Or7nal 6Iu(ment:
Present !alue of tax sa!n7s from de(recaton deductons:
3"2,#00,000 &2 x 0.&# x 2.#$$ * 3"$2&,$012
Present !alue of cash o(eratn7 costs:
O"1,000,000 x 31 , 0.&#2P x 2.#$$ * "2,##1,2%0
Present !alue of sal!a7e !alue:
O"#0,000 x 31 , 0.&#2P x 0.$4& * 3"21,0%#2
Present !alue of c:sts /th the or7nal eIu(ment * -/.004.,/4
Present !alue of C:sts /th the :e/ Machne:
-ntal outlay cost "2,000,000
Present !alue of tax sa!n7s from de(recaton deductons:
Be7nnn7 'e(recaton +ax +ax 'scount
?ear Boo1 ;alue 6x(ense
1
Fate 5a!n7s @actor
1 "2,000,000 "1,%%%,%%% x 0.&# * "800,000 x 0.428 * 3"###,8002
2 888,88$ &&&,&&# x 0.&# * 200,000 x 0.0#$ * 31$1,&002
% 222,22% 222,22% x 0.&# * 100,000 x 0.$4& * 3$4,&002
Cash (roceeds from sale of the old machne 3"%00,0002
+ax sa!n7s related to loss on ds(osal of the old machne:
3"1,0$#,000
2
, "%00,0002 x 0.&# * 3"$00,$#02
Present !alue of cash o(eratn7 costs: "1,000,000 x 31 , 0.&#2 x 2.#$$ * "1,&1$,%#0
Present !alue of c:sts /th the ne/ machne -/.,02.200
:otes:
1
''B de(recaton char7es /ere calculated usn7 the ;'B functon n 6xcel, as
follo/s:
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-!" The McGraw-Hill Companies 2008
STUDENT SOLUTIONS MANUAL
20-', 3Contnued2
2
Boo1 !alue of old asset at tme of sale *
Or7nal cost , accumulated de(recaton *
"2,#00,000 , O3"2,#00,000B&2 x 1 yearP *
"2,#00,000 , "82#,000 * "1,0$#,000
P; of sa!n7s from usn7 the ne/ machne:
"1,00&,81& , "1,802,200 * -202.4/4
+he total cost of the ne/ machne, ncludn7 the (urchase cost and the cash
o(eratn7 cost n each of the three years, s n (resent !alue terms "202,&1& belo/
the total cost of contnun7 /th the or7nal eIu(ment. +herefore, from a (urely
fnancal stand(ont, the (urchase of the ne/ machne s a 7ood n!estment.

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-!# The McGraw-Hill Companies 2008
STUDENT SOLUTIONS MANUAL
20-'0 E%uip("#t R"plac"("#t ;it$ <ACRS D"p3"ciati:# &3' - 4' (i#)
1. Per-unt (roft mar7n of the addtonal unts:
5ales (rce (er unt "%,#00
Current manufacturn7 cost - 2,&#0
Current 7ross mar7n (er unt "1,0#0
Cost sa!n7s (er unt /th the ne/ machne 9 1#0
Cross mar7n 3cash flo/2 (er unt for the addtonal unts "1,200
:et cash nflo/s:
Present 'scount
-tem 'escr(ton ;alue @actor 2010 2011 2012 201%
Purchase cost 3"800,0002
-nstallaton cost 3"12,0002
After-tax (roceeds from ds(osn7 old "%0,000
Cross mar7nBunt 3abo!e2 "1,200 "1,200 "1,200 "1,200
Addtonal unts %0 #0 #0 $0
Pre-tax cash flo/ from addtonal unts 3R0002 " %8 " 80 " 80 " 0&
6ffcency sa!n7s 3R0002 12# 12# 12# 12#
+otal ncrease n (re-tax ncomesBcash flo/ 3R0002 "181 "10# "10# "204
-ncome taxes 3R0002 8&.& $& $& 0%.8
-ncrease n after-tax cash flo/ !efore de(recaton 3R0002 "48.80 "111 "111 "12#.&
After-tax (roceeds from ds(osal 3"00,000 x 0.82 &0
+ax sa!n7s from de(recaton 3R0002 01.0& 111.80 %$.20 1$.%8
After-tax cash nflo/s "1##,2&% 0.0$0 "1$0.&&
"180,208 0.$#8 222.80
"4$,#18 0.8#0 1&0.20
"104,11# 0.#$2 140.$8
:et Present ;alue 3:P;2 3" #4 ,0&0 2
;acu+ech can ex(ect to ha!e a ne7at!e :P; of -'2.040 f t (urchases the ne/ (um(.
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-!$ The McGraw-Hill Companies, 2008
STUDENT SOLUTIONS MANUAL
20-'0 3Contnued2
2. Other factors the frm needs to consder nclude:
Mantenance costs of the machnes
Felablty of the machnes
Chan7es and tmn7 of ne/er machne
6ffects on (roducton /or1ers
Kearnn7 effect on usn7 the ne/ machne
Chan7es n mar1et
Com(ettor reacton
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-!8 The McGraw-Hill Companies, 2008
STUDENT SOLUTIONS MANUAL
20-,0 RisG a# NP5 &4' (i#)
1. P; of future cash nflo/s < 12. * "2$#,000 x 8.14& * "1,$0%,%#0
Kess: -ntal n!estment outlay, year 0 * "1,#00,000
:et (resent !alue 3:P;2 * - 203.3'0
5nce the :P; > "0, the (roject should be acce(ted.
2. P; of future cash nflo/s < 1#. * "2$#,000 x #.&21 * "1,&40,$$#
Kess: -n!estment outlay, year 0 * "1,#00,000
:et (resent !alue 3:P;2 * -&2.22' )
5nce the :P; = "0, the (roject should not be acce(ted.
%. +he Sbrea1-e!enT ntal n!estment outlay s the amount that /ould (roduce a
:P; * "0, 7!en the annual after-tax flo/s of "2$#,000 and a dscount rate of
1#.00.. He can use 6xcel to sol!e, n t/o ste(s, for ths Sbrea1-e!enT amount
* -/.420.,10:
5te( 1: 6stmate the ProjectJs :P; 3com(are /th 2 abo!e2

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-!% The McGraw-Hill Companies, 2008
STUDENT SOLUTIONS MANUAL
20-,0 3Contnued2
5te( 2: Com(lete the follo/n7 S7oal see1T dalo7 box:



&. Many frms rase the dscount rate n e!aluatn7 a (artcular ca(tal n!estment
n !e/ of uncertantes underlyn7 the n!estment. +hs a((roach allo/s
mana7ers to factor n rs1s and uncertantes. +he h7her the rs1 or uncertanty
a (roject has, the h7her the dscount rate.
An alternat!e s to use a drect a((roach n dealn7 /th rs1 or uncertanty.
@or exam(le, f a frm consders that re!enues from an n!estment are l1ely to
dffer from the (rojected f7ures, the frm should adjust the (rojected re!enues.
-f the ex(enses are l1ely to be h7her, adjustn7 the (rojected ex(enses /ould
allo/ the frm to be a/are of the need for a h7her amount of cash outflo/s.
5ome bele!e that usn7 a drect a((roach 3f (ossble2 s better than sm(ly
usn7 a h7her dscount rate. -n any case, the to(c of rs1 adjustments s
handled more com(letely n fnancal mana7ement textboo1s.
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-"0 The McGraw-Hill Companies 2008
STUDENT SOLUTIONS MANUAL
20-,2 U#"4"# Cas$ 7l:;s &40 (i#)
1. Present !alue of net cash nflo/s:
?ear 1 -0-
?ear 2 "1,000,000 x 0.$4$ * " $4$,000
?ear % "1,000,000 x 0.$12 * $12,000
?ear & "2,#00,000 x 0.8%8 * 1,#40,000
?ears #-10 3"%,000,000 x &.1112 x 0.8%8 * $,0&%,$00
Present !alue of net cash nflo/s "10,4&2,$00
Kess: -ntal n!estment outlay, year 0 1#,000,000
:P; 3<12.2 -&4.0'1.2/2)
Alternat!ely, the bult-n functons n 6xcel can be used to estmate the :P;
and the -FF of ths (roject, as follo/s:

2. +he maxmum (urchase (rce the seller /ould be /lln7 to offer, 7!en a
dscount rate of 12. and the ndcated cash flo/s, /ould be sl7htly less than
"11,000,000, as follo/s:
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-"1 The McGraw-Hill Companies 2008
STUDENT SOLUTIONS MANUAL
20-,2 3Contnued2


Blocher, Stout, Cokins, Chen, Cost Management, 4/e 20-"2 The McGraw-Hill Companies 2008