Problem 1.

a/ Depreciable basis : $50,000 + $10,000 = $60,000

b/ Yes there is a tax effect when selling the earth mover. The calculation will be as follows:

Termination Cash Flow:

Salvage value $20,000
Tax on salvage value* -6,320
Net working capital recovery 2,000
Termination cash flow $15,680

*Calculation of tax on salvage value:

Book value = Depreciation basis – Accumulated depreciation

= 60,000 – (60,000*0.33 + 60,000*0.44 + 60,000*0.14 ≈ 55,800) = 4,200

Sales price $20,000

Less book value 4,200
Taxable income 15,800
Tax @ 40% 6,320

c/ OCF:

Year 1 Year 2 Year 3

1. After-tax cost $18,000 $18,000 $18,000
savings (tiết
kiệm chi phí
cũng là một
khoản
revenue)
2. Depreciation 19,800 27,000 9,000
(tính toán anh
tính ở phía
trên, anh có
rounding nữa
nên có thể
đáp án sẽ lệch
với mấy đứa 1
chút)
3. Depreciation 7,920 10,800 3,600
tax savings
(tấm chắn
thuế - tax
shield)
OCF 25,920 28,800 21,600
Project NPV -62,000 25,920/(1.10)1 28,800/(1.10)2 21,600/(1.10)3
 NPV 1593.69

Project should be taken as NPV > 0!!

Problem 2.

Year MACRS percentage Depreciation Ending book value

1 0.1429 0.1429*1,250,000 = 1,071,375
178,625
2 0.2449 0.2449*1,250,000 = 765,250
306,125
3 0.1749 0.1749*1,250,000 = 546,625
218,625
4 0.1249 0.1249*1,250,000 = 390,500
156,125

Tính Operating Cash flows:

Year
1 2 3 4
Sales $6,000,000 $6,000,000 $6,000,000 $6,000,000
Variable costs 2,400,000 2,400,000 2,400,000 2,400,000
Fixed costs 450,000 450,000 450,000 450,000
Depreciation (1) 178,625 306,125 218,625 156,125
EBIT 2,971,375 2,843,875 2,931,375 2,993,875
Taxes (34%) -1,010,268 -966,918 -996,668 -1,017,918
Net income (2) 1,961,108 1,876,958 1,934,708 1,975,958
OCF (1 + 2 ) 2,139,732 2,183,082 2,153,332 2,132,082
Tính total Cash flows:

YEAR
0 1 2 3 4
OCF 2,139,732 2,183,082 2,153,332 2,132,082
Change in -1,150,000 -350,000 1,500,000
NWC
Capital -1,250,000 545,270
spending
Total cash flow -2,400,000 1,789,732 2,183,082 2,153,332 4,177,352
NCF 2,913,649

Problem 3.
Both cases, after-tax salvage value >>>> bài này ko có

a.

System A

OCF = -110,000*(1 – 34%) + (430,000/4)*(34%) = -36,050

NPV = -430,000 + (-36,050)*3.1024 = -541,841.52

EAC = -541,841.52/3.1024 = -174,652.37

System B

OCF = -98,000*(1 – 34%) + (570,000/6)*(34%) = -32,380

NPV = -570,000 + (-32,380)*4.2305= -706,983.59

EAC = -706,983.59/4.2305 = -167,115.8468

>>> system B as EACB < EACA

b.

tính lại thằng system B EAC (4 năm) = -706,983.59/3.1024 = -227,882.7972

chọn thằng A vì thằng A rẻ hơn

Problem 4.

Part A.

a. This is the firm’s cash flow with the project minus the firm’s cash flow without the project.
b. The cash flow statement should not include interest expense or dividends. The return required
by the investors furnishing the capital is already accounted for when we apply the 10% cost of
capital discount rate; hence, including financing flows would be “double counting.” Put another
way, if we deducted capital costs in the table, and thus reduced the bottom-line cash flows, and
then discounted those CFs by the cost of capital, we would, in effect, be subtracting capital costs
twice.
c. The $100,000 cost to rehabilitate the production line site was incurred last year, and presumably
also expensed for tax purposes. Since, it is a sunk cost, it should not be included in the analysis.
d. If the plant space could be leased out to another firm, then if Shrieves accepts this project, it
would forgo the opportunity to receive $25,000 in annual cash flows. This represents an
opportunity cost to the project, and it should be included in the analysis. Note that the
opportunity cost cash flow must be net of taxes, so it would be a $25,000(1 – T) = $25,000(0.6) =
$15,000 annual outflow.
e. If a project affects the cash flows of another project, this is an “externality” that must be
considered in the analysis. If the firm's sales would be reduced by $50,000, then the net cash
flow loss would be a cost to the project. Note that this annual loss would not be the full
$50,000, because Shrieves would save on cash operating costs if its sales dropped. Note also
that externalities can be positive as well as negative.
Part B.

a. The asset’s depreciable basis includes shipping and installation costs. Thus, the asset’s
depreciable basis = $200,000 + $10,000 + $30,000 = $240,000. Get the depreciation rates from
Table 11A-2 in the book. Note that because of the half-year convention, a 3-year project is
depreciated over 4 calendar years:

Year Rate  Basis = Depreciation

1 0.3333 $240 $ 80

2 0.4445 240 107

3 0.1481 240 35

4 0.0741 240 18

$240

b.

Year 1 Year 2 Year 3 Year 4

Sales $250,000 $257,500 $265,225 $273,188
Costs 125,000 128,750 132,613 136,588
Depreciation 79,992 106,680 35,544 17,784
Op. EBIT $45,008 $22,070 $97,069 $118,807
Taxes (40%) 18,003 8,828 38,827 47,523
EBIT(1 – T) $27,005 $13,242 $58,241 $71,284
Depreciation 79,992 106,680 35,544 17,784
Net Operating CF $106,997 $119,922 $93,785 $89,068

c.

The project requires a level of net working capital in the amount equal to 12% of the next
year’s sales. Any increase in NWC is a negative cash flow, and any decrease is a positive
cash flow. This project has a 4-year operating life, so any NWC expenditures will be
recovered in Year 4. (That is, accounts receivables are received and inventories are drawn
down.)
 Year 0 Year 1 Year 2 Year 3 Year 4
Sales $250,000 $257,500 $265,225 $273,188
NWC (12% of sales) $30,000 $30,900 $31,827 $32,783 $0
CF due to NWC ($30,000) ($900) ($927) ($956) $32,783

d.

When the project is terminated at the end of Year 4, the equipment can be sold for $25,000.
But, since it has been depreciated to a $0 book value, taxes must be paid on the full salvage
value. For this project, the after-tax salvage cash flow is:

Salvage Value $25,000

Tax on Salvage Value (10,000)

Net After-Tax Salvage Cash Flow $15,000

Problem 5.

a) 50,000 + 20,000 = 70,000

b) That is, accounts receivable are finally collected, the project’s cash buffer is returned to the rest
of the corporation, and all remaining inventory is sold off. This frees up cash

Year 0 Year 1 Year 2 Year 3 Year 4

-75,000 33,332 36,446 28,147 37,075
NPV 12,254.695

Problem 6.

0 1 2 3 4 5
Initial -320,000
invest
ment
on
fixed
assets
Sale of +30,000 =
FA at 30,000 –
the (30,000-
end of 30,000)*0.25
Year 5
NWC -25,000 +25,000
 Cash $150,000*0 $150,000*0. $150,000*0. $150,000*0. $150,000*0.
Flows .75 + 75 + 58,000 75 + 58,000 75 + 58,000 75 + 58,000
58,000 – – 16,000 = = 170,500 = 170,500 = 170,500
20,000 154,500
= 150,500
$
Total -345,000 150,500 154,500 170,500 170,500 225,500
CF for
NPV
NPV -345,000 150,500/ 154,500/ 170,500/ 170,500/ 225,500/
(1.1345) (1.1345)^2 (1.1345)^3 (1.1345)^4 (1.1345)^5
NPV -345,000 132,657.55 120,038.202 116,764.515 102,921.565 119,984.195
84 4 8 3 8
247,366.
0293

Problem 7.

a> No, sunk cost

b> Yes

c> No, incurred no matter what

d> Nope, as it is already included in cost of capital

e> Yes, opportunity cost

Problem 8.

Cash Flows if replaced every year

Year 0 1
Depreciation (14,000)
Maintenance cost (11,000)
Effect on tax payable (25,000)
Effect on tax paid (7,000)

Year 0 1
Cost of machine (64,000)
Salvage 50,000 = 50,000 – (50000-
(64,000-14,000))*0.28
Maintenance cost (11,000)
Tax benefit (tax shield) 7,000
Net cash flows (64,000) 46,000
NPV (24,000)
EAC (27,600) = 24,000/0.8696

Cash Flows if replaced three year

Year 0 1 2 3
Depreciation (11,333) (11,333) (11,333)
Maintenance cost (11,000) (13,000) (18,000)
Effect on tax (22,333) (24,333) (29,333)
payable
Effect on tax paid (6,253.24) (6,813.24) (8,213.24)

Year 0 1 2 3
Cost of machine (64,000)
Salvage 30,000
Maintenance cost (11,000) (13,000) (18,000)
Tax benefit (tax 6,253.24 6,813.24 8,213.24
shield)
Net cash flows (64,000) (4746.76) (6186.76) 20,213.24
NPV -59,515.16388
EAC (26,066) =
59,515.16388/2.2832

Cash Flows if replaced five year

Year 0 1 2 3 4 5
Depreciation (12,100) (12,100) (12,100) (12,100 (12,100)
)
Maintenance (11,000) (13,000) (18,000) (24,000 (28,000)
cost )
Effect on tax (23,100) (23,100) (23,100) (23,100 (23,100)
payable )
Effect on tax (6,468) (6,468) (6,468) (6,468) (6,468)
paid

Year 0 1 2 3 4 5
Cost of (64,000)
machine
Salvage 3,500
Maintenance (11,000) (13,000) (18,000) (24,000 (28,000)
cost )
Tax benefit 6,468 6,468 6,468 6,468 6,468
(tax shield)
Net cash (64,000) (4,532) (6,532) (11,532) (17,532) (18,032)
flows
NPV (99,451)
EAC (29,667) =
99,451/3.3522
Problem 9.

a. NPV = -2681.34; IRR = 11.857%

b. Time value of money