Chapter 12 Solutions

E12.1 Owners equity = $2,690,000 - $1,600,000 = $1,090,000. Weighted average cost

of capital = ($1,600,000/$2,690,000 * 0.09) + ($1,090,000/$2,690,000 * 0.14) =
11.03%
E12.2 ($1,600,000/$2,690,000 * 0.11) + ($1,090,000/$2,690,000 * 0.14) = 12.22%
E12.3 ANN = $8,857, n = 10, c = 1, r = 12, FV = 0, PV = $50,044.03
NPV = $50,044.03 - $46,200 = $3,844.03. The company should buy the machine.
E12.4 ANN = $2,850, n = 5, c = 1, r = 14, FV = 0, PV = $9,784.28. The maximum
amount the United Way should pay is $9,784.28.
NPV = $9,784.28 - $9,000 = $784.28. Since the NPV is positive, they should
acquire the machine
E12.5 ANN = $192,850, n = 8, c = 1, r = 14, FV = 0, PV = $894,604.90
NPV = $894,604.90 - $958,000 = ($63,395.10). They should not buy the
machine.
E12.6 c = 1, r = 15, ANN = 0, FV = $14,000, n = 1, PV = $12,173.91
c = 1, r = 15, ANN = 0, FV = $12,000, n = 2, PV =
9,073.72
c = 1, r = 15, ANN = 0, FV = $10,000, n = 3, PV =
6,575.16
c = 1, r = 15, ANN = 0, FV = $8,000, n = 4, PV =
4,574.03
c = 1, r = 15, ANN = 0, FV = $6,000, n = 5, PV =
2,983.06
c = 1, r = 15, ANN = 0, FV = $4,000, n =6, PV =
1,729.31
Total present value
$37,109.19
Initial investment
(42,600.00)
NPV
$(5,490.81)
Murdock should not purchase the copier.
E12.11
Year
1

After-tax
After-tax Cash Tax Shield
Cash Inflow
Outflow
$7,490
$1,890
$2,800

After-tax
Cash Flows
$8,400

7,490

2,275

3,734

8,949

7,490

2,800

1,244

5,934

7,490

3,150

623

4963

E12.12 Book value = $155,000 - $50,700 = $104,300

Proceeds
$116,000
Gain
$11,700
Less BV
(104,300)
Tax
0.30
Gain
$ 11,700
Tax paid $ 3,510
Proceeds
Less BV
Loss

$ 94,000
(104,300)
$ 10,300

Loss
$10,300
Tax
0.30
Tax saved $ 3,090

Proceeds
$116,000
Tax paid
3,510
Cash inflows $112,490
Proceeds
$94,000
Tax saved
3,090
Cash inflows $97,090

E12.13 After-tax cash flows:

2008 $42,000 * 0.7 = $29,400
c = 1, r = 12, ANN = 0, FV = $29,400, n = 1, PV = $ 26,250.00
2009 $48,000 * 0.7 = $33,600
c = 1, r= 12, ANN = 0, FV = $33,600, n = 2, PV =
26,785.71
2010 $50,000 * 0.7 = $35,000
c = 1, r = 12, ANN = 0, FV = $35,000, n = 3, PV =
24,912.31
2011 $46,000 * 0.7 = $32,200
c = 1, r = 12, ANN = 0, FV = $32,200, n = 4, PV =
20,463.68
2012 $32,000 * 0.7 = $22,400
c = 1, r = 12, ANN = 0, FV = $22,400, n = 5, PV =
12,710.36
2013 $51,000 * 0.7 = $35,700
c = 1, r = 12, ANN = 0, FV = $35,700, n = 6, PV =
18,086.73
2014 $34,000 * 0.7 = $23,800
c = 1, r = 12, ANN = 0, FV = $23,800, n = 7, PV =
10,765.91
Tax shield:
$196,000/7 = $28,000 depreciation * 0.3 = $8,400 tax shield
c = 1, r = 12, FV = 0, ANN = $8,400 , n = 7, PV =
38,335.55
Total present value
$178,310.25
Initial investment
(196,000.00)
NPV
$(17,689.75)
Alvarado should not investment in this machine.
E12.17 Investment A:
Tax shield:
$26,000 * 0.3 = $7,800
c = 1, r = 12, FV = 0, ANN = $7,800, n = 4, PV =
After-tax cash flows:
2006 $38,000 * 0.7 = $26,600
c = 1, r = 12, ANN = 0, FV = $26,600, n = 1, PV =
2007 $42,000 * 0.7 = $29,400
c = 1, r = 12, ANN = 0, FV = $29,400, n = 2, PV =
2008 $34,000 * 0.7 = $23,800
c = 1, r = 12, ANN = 0, FV = $23,800, n = 3, PV =
2009 $36,000 * 0.7 = $25,200
c = 1, r = 12, ANN = 0, FV = $25,200, n = 4, PV =
Total present value of cash flows
Initial investment
NPV
Investment B:
Tax shield:
$25,000 * 0.3 = $7,500
c = 1, r = 12, FV = 0, ANN = $7,500, n = 6, PV =
After-tax cash flows:
2006 $48,000 * 0.7 = $33,600

$ 23,691.32
23,750.00
23,437.50
16,940.37
16,015.06
$103,834.25
(104,000.00)
$ (165.75)

$ 30,835.55

c = 1, r = 12, ANN = 0, FV = $33,600, n = 1, PV =

30,000.00
2007 $46,000 * 0.70 = $32,200
c = 1, r = 12, ANN = 0, FV = $32,200, n = 2, PV =
25,669.64
2008 $60,000 * 0.7 = $42,000
c = 1, r = 12, ANN = 0. FV = $42,000, n = 3, PV =
29,894.77
2009 $51,000 * 0.7 = $35,700
c = 1, r = 12, ANN = 0, FV = $35,700, n = 4, PV =
22,688.00
2010 $53,000 * 0.7 = $37,100
c = 1, r = 12, ANN = 0, FV = $37,100, n = 5, PV =
21,051.54
2011 $52,000 * 0.7 = $36,400
c = 1, r = 12, ANN = 0, FV = $36,400, n = 6, PV =
18,441.37
Total present value of cash flows
$178,580.87
Initial investment
(150,000.00)
NPV
$ 28,580.87
Chin Imports should invest in Investment B. However since Investment A is only
slightly negative, Chin should consider whether other balanced scorecard goals
would make this investment desirable.
E12.18 2007 c = 1, ANN = 0, r = 12, FV = $240,000, n = 1, PV =
$ 214,285.71
2008 c = 1, ANN = 0, r = 12, FV = $260,000, n = 2, PV =
207,270.41
2009 c = 1, ANN = 0, r = 12, FV = $253,000, n = 3, PV =
180,080.40
2010 c = 1, ANN = 0, r = 14, FV = $290,000, n = 4, PV =
171,703.28
2011 c = 1, ANN = 0, r = 14, FV = $310,000, n = 5, PV =
161,004.29
2012 c = 1, ANN = 0, r = 14, FV = $222,000, n = 6, PV =
101,140.21
2013 c = 1, ANN = 0, r = 15, FV = $240,000, n = 7, PV =
90,224.89
2014 c = 1, ANN = 0, r = 15, FV = $220,000, n = 8, PV =
71,918.39
Total present value of cash flows
$1,197,627.58
Initial investment
(1,040,000.00)
NPV
$ 157,627.58
Sprague should invest in the diagnostic machine.
P12.4
a.
2006: $21,500 * 0.7 = $15,050
$80,000 * 0.1429 * .3 = $3,429.60
c = 1, r = 14, ANN = 0, FV = $18,479.60, n = 1, PV =
2007: $25,000 * 0.7 =$17,500
$80,000 * 0 .2449 * .3 = $5,877.60
c = 1, r =14, ANN = 0, FV = $23,377.60, n = 2, PV =
2008: $22,000 * 0.7 = $15,400
$80,000 * 0.1749 * 0.3 = $4,197.60
c = 1, r = 14, ANN = 0, FV = $19,597.60, n = 3, PV =
2009: $20,000 * 0.7 = $14,000
$80,000 * 0.1249 * 0.3 = $2,997.60
c = 1, r = 14, ANN = 0, FV = $16,997.60, n = 4, PV =
2010: $19,000 * 0.7 = $13,300
$80,000 * 0.0893 * 0.3 = $2,143.20

$ 16,210.18
17,988.30
13,227.82
10,063.94

b.

c = 1, r = 14, ANN = 0, FV = $15,443.20, n = 5, PV =

8,020.71
2011: $17,500 * 0.7 = $12,250
$80,000 * 0.0892 * 0.3 = $2,140.80
c = 1, r = 14, ANN = 0, FV = $14,390.80, n = 6, PV =
6,556.25
2012: $16,000 * 0.7 = $11,200
$80,000 * 0.0893 * 0.3 = $2,143.20
c = 1, r = 14, ANN = 0, FV = $13,343.20, n = 7, PV =
5,332.44
2013: $14,000 * 0.7 = $9,800
$80,000 * 0.0446 * 0.3 = $1,070.40
c = 1, r = 14, ANN = 0, FV = $10,870.40, n = 8, PV =
3,810.72
Total present value of cash flows
$ 81,210.36
Initial investment
(80,000.00)
NPV
$ 1,210.36
Yes, because the NPV is positive indicating that the expected return on the
investment is greater than the cost of capital.

P12.5
a.
Sale of old boat:
Proceeds
$32,000 Gain on sale $4,000 Proceeds
$32,000
- BV
28,000 Tax rate
0.3 Tax paid
(1,200)
Gain on sale $ 4,000 Tax paid
$1,200 Cash inflow $30,800
Present value of cash flows from sale of old boat

$ 30,800.00

Sale of new boat:

Proceeds
$20,000 Gain on sale $20,000 Proceeds
$20,000
- BV
-0- Tax rate
0.3 Tax paid
6,000
Gain on sale $20,000 Tax paid
$ 6,000 Cash inflow $14,000
c = 1, r = 15, ANN = 0, FV = $14,000, n = 6, PV =
2006
2007
2008
2009
2010

$67,500 - $30,000 = $37,500 * 0.7 = $26,250

$100,000 * 0.2 * 0.3 = $6,000
c = 1, r = 15, ANN = 0, FV = $32,250, n = 1, PV =
$84,000 - $45,000 = $39,000 * 0.7 = $27,300
$100,000 * 0.32 * 0.3 = $9,600
c = 1, r = 15, ANN = 0, FV = $36,900, n = 2, PV =
$73,500 - $37,500 = $36,000 * 0.7 = $25,200
$100,000 * 0.192 * 0.3 = $5,760
c = 1, r = 15, ANN = 0, FV = $30,960, n = 3, PV =
$67,500 - $34,500 = $33,000 * 0.7 = $23,100
$100,000 * 0.1152 * 0.3 = $3,456
c = 1, r = 15, ANN = 0, FV = $26,556, n = 4, PV =
$62,000 - $30,000 = $32,000 * 0.7 = $22,400
$100,000 * 0.1152 * 0.3 = $3,456
c = 1, r = 15, ANN = 0, FV = $25,856, n = 5, PV =

6,052.59

28,043.48
27,901.70
20,356.70
17,461.00
12,855.00

2011

b.

$59,000 - $32,000 = $27,000 * 0.7 = $18,900

$100,000 * 0.0576 * 0.3 = $1,728
c = 1, r = 15, ANN = 0, FV = $20,628, n = 6, PV =
8,918.05
Total present value of cash flows
$152,388.52
Initial investment
(100,000.00)
NPV
$ 52,388.52
Yes, because the positive NPV indicates that the expected return on the
investment exceeds the cost of capital.

P12.10
a.
Investment A:
Tax shield: $172,000 * 0.3 = $51,600
c = 1, r = 16, FV = 0, ANN = $51,600, n = 5, PV =
After-tax cash flows:
2007 $296,200 * 0.7 = $207,340
c = 1, r = 16, ANN = 0, FV = $207,340, n = 1, PV =
2008 $326,200 * .7 = $228,340
c = 1, r = 16, ANN = 0, FV = $228,340, n = 2, PV =
2009 $383,400 * 0.7 = $268,380
c = 1, r = 16, ANN = 0, FV = $268,380, n = 3, PV =
2010 $440,800 * 0.7 = $308,560
c = 1, r = 16, ANN = 0, FV = $308,560, n = 4, PV =
2011 $496,000 * 0.7 = $347,200
c = 1, r = 16, ANN = 0, FV = $347,200, n = 5, PV =
Total present value of cash flows
Initial investment
NPV
Investment B:
Tax shield: $172,000 * 0.3 = $51,600
c = 1, r = 16, FV = 0, ANN = $51,600, n = 5, PV =
After-tax cash flows:
2007 $254,000 * 0.7 = $177,800
c = 1, r = 16, ANN = 0, FV = $177,800, n = 1, PV =
2008 $283,400 * .7 = $198,380
c = 1, r = 16, ANN = 0, FV = $198,380, n = 2, PV =
2009 $312,000 * 0.7 = $218,400
c = 1, r= 16, ANN = 0, FV = $218,400, n = 3, PV =
2010 $340,400 * 0.7 = $238,280
c = 1, r = 16, ANN = 0, FV = $238,280, n = 4, PV =
2011 $368,600 * 0.7 = $258,020
c = 1, r = 16, ANN = 0, FV = $258,020, n = 5, PV =
Total present value of cash flows
Initial investment
NPV

$ 168,953.55
178,741.38
169,693.82
171,939.71
170,414.94
165,306.44
$1,025,049.84
(860,000.00)
$ 165,049.84

$ 168,953.55
153,275.86
147,428.66
139,919.64
131,599.92
122,846.68
$ 864,024.31
(860,000.00)
$
4,024.31

b.

Both projects are acceptable since their NPVs are positive. However, the second
project is riskier since its NPV is smaller meaning that fluctuations in projected
cash flows could more easily turn it into an undesirable project.