Brealey Principles 12e

Pr 6-2

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Payment in one year $100,000
Nominal discount rate 8%
Inflation rate 4%

Solution and Explanation:

Real cash flow $96,154
Real discount rate 3.846%
PV using real values $92,593

Notes:
lgo versions.
Brealey Principles 12e
Pr 6-4

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Depreciation rates - 5 yr 20.00% 32.00% 19.20% 11.52% 11.52%
Depreciation rates - 7 yr 14.29% 24.49% 17.49% 12.49% 8.93%
Tax rate 35%
Discount rate 10%

Solution and Explanation:

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
PV of the depreciation rates - 5 yr .1818 .2645 .1443 .0787 .0715
PV of the depreciation rates - 7 yr .1299 .2024 .1314 .0853 .0554

PV of tax shield - 5 year .271

PV of tax shield - 7 year .253

Notes:
 Yr 6 Yr 7 Yr 8
5.76%
8.92% 8.93% 4.46%

Yr 6 Yr 7 Yr 8 NPV
.0325 .7733
.0504 .0458 .0208 .7214
Brealey Principles 12e
Pr 6-5

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Year: 2016 2017 2018 2019
Accounts receivable $0 $150,000 $225,000 $190,000
Inventory 75,000 130,000 130,000 95,000
Accounts payable 25,000 50,000 50,000 35,000

Solution and Explanation:

Year: 2016 2017 2018 2019
Net working capital $50,000 $230,000 $305,000 $250,000
Cash flows -50,000 -180,000 -75,000 55,000

Notes:
ew algo versions.

2020
$0
0
0

2020
$0
250,000
Brealey Principles 12e
Pr 6-7

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Installation cost $1,500,000
Annual operating cost $200,000
System life in years 25
Real cost of capital 5%

Solution and Explanation:

PV of costs $4,318,788.91
EAC $306,428.69
Brealey Principles 12e
Pr 6-8

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Real Cash Flows ($ thousands)
Machine C0 C1 C2 C3
A -100 110 121
B -120 110 121 133
Life of A in years 2
Life of B in years 3

Real opportunity cost of capital 10%

Solution and Explanation:

NPV A $100,000
NPV B $179,925
EAC A $57,619
EAC B $72,350
Buy Machine B

Notes:
Brealey Principles 12e
Pr 6-9

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Machine C cost $200,000
Machine C annual real cash flow $80,000
Machine C remaining life years 5
Machine B C0 -$120,000
Machine B C1 $110,000
Machine B C2 $121,000
Machine B C3 $133,000
Machine B life years 3
Real opportunity cost of capital 10%

Solution and Explanation:

NPVB $179,924.87
EACFB $72,350

Replace now or in 5 years? Replace in 5 years

Notes:
algo versions.
Brealey Principles 12e
Pr 6-10

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
0 1 2 3 4
Nominal cash flows -12,600 -1,484 2,947 6,323 10,534
Nominal rate 20%
Inflation rate 10%

Solution and Explanation:

Real rate 9.09%
0 1 2 3 4
Real cash flows -12,600 -1,349 2,436 4,751 7,195
NPV of real cash flows $3,802

Notes:
w algo versions.

5 6 7
9,985 5,757 3,269

5 6 7
6,200 3,250 1,678
Brealey Principles 12e
Pr 6-14

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Kiln cost $400,000
Installation cost $50,000
Tax rate 35%
Opportunity cost of capital 5%

Year 1 Year 2 Year 3 Year 4 Year 5

MACRS rates 20.00% 32.00% 19.20% 11.52% 11.52%

Solution and Explanation:

Expensed - value of tax shield $16,667

Depreciated - value of tax shield $15,306

Aftertax cost smaller if Expensed

Notes:
Year 6
5.76%
Brealey Principles 12e
Pr 6-16

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Additional investment $100,000
Cash inflow $26,000
Cash inflow years 5
Company A tax rate 0%
Company B tax rate 35%
Opportunity cost of capital 8%

Year 1 Year 2 Year 3 Year 4

MACRS rates 20.00% 32.00% 19.20% 11.52%

Solution and Explanation:

NPVA $3,810
NPVB -$4,127

Year: 0 1 2 3
Aftertax cash flowsA -$100,000 $26,000 $26,000 $26,000
IRRA 9.43%

Aftertax cash flowsB: -$100,000 $23,900 $28,100 $23,620

IRRB 6.39%

Effective tax rate 32.3%

Notes:
go versions.

Year 5 Year 6
11.52% 5.76%

4 5
$26,000 $26,000

$20,932 $20,932 $2,016

Brealey Principles 12e
Pr 6-20

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Transporter cost $35,000
Rentals per year 26
Rent per day $200
Rent per mile $1
Average trip in miles 90
Rental tip $40
New cost per mile $.45
Insurance cost $1,200
Real value in 8 years $15,000
Nominal discount rate 9%
Inflation rate 3%

Solution and Explanation:

(Figures in $) Year: 0 1 2 3 4
Investment and recovery -35,000
Rental savings 8,580 8,580 8,580 8,580
Insurance cost -1,200 -1,200 -1,200 -1,200
Mileage cost -1,053 -1,053 -1,053 -1,053
Net cash flow -35,000 6,327 6,327 6,327 6,327
NPV $14,098.79

Real rate 5.83%

Notes:
algo versions.

5 6 7 8
15,000
8,580 8,580 8,580 8,580
-1,200 -1,200 -1,200 -1,200
-1,053 -1,053 -1,053 -1,053
6,327 6,327 6,327 21,327
Brealey Principles 12e
Pr 6-24

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Newer machine: After-tax value
Sell today $71,000 46150
Operating cost 1-5 $22,800 14820
Year 5 overhaul $18,600 12090
Operating cost 6-10 $31,400 20410
Year 10 sale $7,100 4615

Older machine:
Sell today $26,400 17160
Immediate overhaul $27,000 17550
Operating cost 1-5 $37,000 24050
Year 5 sale $7,100 4615

Tax rate 35%

Real cost of capital 12%

Number of years 1 5
Number of years 2 10

Solution and Explanation:

a.
Alternative I: Sell new, keep old
PV -$55,476.19
EAC $15,389.64

Alternative II; Sell old, keep new

PV -$83,384.64
EAC $14,757.76

b.
Which should be sold? Sell new
Notes:
x
Brealey Principles 12e
Pr 6-25

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
LE Light bulb cost $3.60
LE Life in years 9
LE Electricty cost per year $2.00
Light bulb cost $.60
Life in years 1
Electricity cost per year $7.00
Real discount rate 4%

Solution and Explanation:

PV LE -$18.47
EAC LE -$2.48

PV Conventional -$7.33
EAC Conventional -$7.62

Select Low energy

x
Brealey Principles 12e
Pr 6-26

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Old copier cost $20,000
Old maintenance cost yr 1-2 $2,000
Old maintenance cost yr 3-6 $8,000
Remaining life years 6
Number of years new cost 4
Current resale old $8,000
Resale old yr 2-6 $3,500
New copier cost $25,000
New maintenance contract $1,000
New number of years 8
Tax rate 35%
Real cost of capital 7%
Number of years sell 2 10
Number of years sell 6 14

Year:
MACRS rates .1429 .2449 .1749

Solution and Explanation:

Year: 1 2 3
Cash flows old -$674.90 -$675.60 -$4,574.90
PVold -$15,856.71
EACold -$3,326.67

Year: 0 1 2
Cash flows new -$25,000 $600.38 $1,492.88
NPVnew -$21,967.19

Aftertax sale NPV new cash

value old: flows Total NPV
Sell now: $7,386.80 -$21,967.19 -$14,580.39
 NPV aftertax NPV new cash
NPV old Yr 1-2 sale value old: flows
Sell in 2 years: -$1,220.84 $2,805.75 -$19,186.99

NPV old 1-6 NPV new Total NPV

Sell in 6 years: -$15,856.71 -$14,637.67 -$30,494.38

Minimum EAC -$2,441.75

Replacement options: Never Now in 2 years

Replacement decision Replace now

Notes:
The number of years must be held constant at the static values.
to review algo versions.

.1249 .0893 .0892 .0893 .0446

4 5 6
-$4,887.80 -5200 -5200

3 4 5 6 7 8
$880.38 $442.88 $131.38 $130.50 $131.38 -$259.75

EAC
-$2,441.75
Total NPV EAC
-$17,602.09 -$2,506.14

EAC
-$3,486.88

in 6 years
Brealey Principles 12e
Pr 6-27

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Investment (in millions) $400
Years 25
Real cost of capital 7%

Solution and Explanation:

Annuity payment $34,324,207

Notes:
Brealey Principles 12e
Pr 6-28

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Investment (in millions) $400
Real cost of capital 7%
Tax rate 39%
Years 25
b. Gallons (in millions) 900

Years: 1 2 3 4 5
MACRS rates .1000 .1800 .1440 .1152 .0922

Solution and Explanation:

a.
Years: 1 2 3 4 5
Depreciation 40.00 72.00 57.60 46.08 36.88
Tax shield 15.60 28.08 22.46 17.97 14.38

PV $114,571,043
EAC $9,831,400

Annuity payment $34,324,207

EAC of capital investment $24,492,806

b.
Aftertax cost per gallon $.0272
Pretax cost per gallon $.0446

Notes:
Connect must provide the assumed total gallons for part b.
go versions.

6 7 8 9 10 11
.0737 .0655 .0655 .0656 .0655 .0328

6 7 8 9 10 11
29.48 26.20 26.20 26.24 26.20 13.12
11.50 10.22 10.22 10.23 10.22 5.12
Brealey Principles 12e
Pr 6-29

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Year: 0 1 2 3 4
Machine A costs 40000 10000 10000 10000
Machine B costs 50000 8000 8000 8000 8000

Real discount rate 6%

Life A 3
Life B 4
c. Inflation rate 8%

Solution and Explanation:

a.
PVA -$66,730.12
EACA -$24,964.39

PVB -$77,720.84
EACB -$22,429.57

b.
Purchase Machine B

c.
Machine B rent Year 2 -$24,223.94

Notes:
go versions.
Brealey Principles 12e
Pr 6-30

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Year: 0 1
Machine A costs 40000 10000
Machine B costs 50000 8000

Real discount rate 6%

Life A 3
Life B 4
Cash flow reduction rate 10%

Solution and Explanation:

a.
PVA -$61,820.36
EACA -$23,127.60

PVB -$71,613.83
EACB -$20,667.14
w algo versions.
Brealey Principles 12e
Pr 6-31

All input values are shown in yellow. Only these values need changed to review algo versions.
Answers are displayed in red.
Assumptions and other problem notes are displayed at the very bottom.

Input variables:
Increase in operating costs $20,000
Airline savings $100,000
New replacement year 3
Old replacement year 4
New jet cost $1,100,000
New jet life 6
Real cost of capital 8%

Solution and Explanation:

New jet EAC $237,946.92
PV of EAC - year 4 (replaced end
of year 3) $174,898.09

PV of cost savings $206,167.76

Allow other officers Yes

Notes: