Cost of equipment = $ 7,750

Book value = $ 0

ANNUAL DEPRECIATION USING STRAIGT LINE METHOD

Depreciation =( $7750 - $0)/ 4 = $ 7750/4 = $ 1937.5 per year

ANNUAL DEPRECIATION USING WDV (Written down value) METHOD

Suppose annual rate is 15%

Year Cost Rate Dep. Acc. Dep.

1 7,750.00 15% 1,162.50 1,162.50
2 6,587.50 15% 988.13 2,150.63
3 5,599.38 15% 839.91 2,990.53
4 4,759.47 15% 713.92 3,704.45
5 4,045.55 15% 606.83 4,311.28
6 3,438.72 15% 515.81 4,827.09
7 2,922.91 15% 438.44 5,265.53
8 2,484.47 15% 372.67 5,638.20

BETA

r = rRF + b* (rM - rRF) rM = 15%

rRF = 8%
r= 8% + 1.2 * (15% - 8%) b= 1.2

r = 8% + 8.4% = 16.4%

Problem 11-6 on 472

Part (a)
Price of equipment $1,080,000
Cost of installation 22,500
 Depreciaable cost $1,102,500
Add: Increase in WC 15,500
$1,118,000

Year 0 cash flow ($1,118,000)

Part (b)
Savings in operating costs
After-tax savings in opearting costs (1-0.35)
Depreciable cost
Depreciation rate
Depreciation expense
Tax savings due to depreciation (x 0.35)
Net operating cash flows

Part (c.) Book value in Year 4 =(1-0.3333-0.4445-0.1481)*1,102,500

81,695
Salvage value = $605,000
Gain on disposal =605,000 - 81, 695
523,305
Tax on gain @35% = 523,305 *35%
183,157
After-tax gain on disposal = 605,000 - 183,157
= 421,843

Additional cash flows in Year 3

After-tax gain on disposal
Recovery of WC

Part (d.) Cost of capital = 12%

Year 0 1
(1,118,000) $375,612
PVIF 1.0000 0.8929
PVs (1,118,000.00) 335,367.98
NPV = $ 78,789.42

As NPV >0, so we should go for this project

7.5 per year

wn value) METHOD

WDV
6,587.50
5,599.38
4,759.47
4,045.55
3,438.72
2,922.91
2,484.47
2,111.80
 <=== negative because it is an outflow

Year 1 Year 2 Year3

$380,000 $380,000 $380,000
$247,000 $247,000 $247,000
$1,102,500 $1,102,500 $1,102,500
0.3333 0.4445 0.1481
$367,463 $490,061 $163,280
$128,612 $171,521 $57,148
$375,612 $418,521 $304,148

3333-0.4445-0.1481)*1,102,500

000 - 81, 695

305 *35%

421,843
15,500
437,343

2 3
$418,521 $741,491
0.7972 0.7118
333,642.73 527,778.71