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CHAPTER 10A PROBLEMS
PROBLEM 10-1A
CAPITAL GAIN TAX
DATA
Purchase 30,000
Expected life 10
Salvage value 0
Depreciation 3,000
Selling price 35,000
Tax rate 34%
Years from when purch 5
A)
Taxes =
B)
Selling price 25,000
Taxes =
C)
Selling price 15,000
Taxes =
D)
Selling price 12,000
Taxes =
PROBLEM 10-2A
CASH FLOW CALCULATIONS
DATA
Existing Situation:
Mach operator 20,000
Maintenance 5,000
Defects 5,000
Original cost of old 30,000
Expected life 10
Age 5
Expected salvage 0
Depreciation 3,000
Current salvage value 10,000
Tax rate 34%
Proposed Situation
automated
Cost 55,000
Installation 5,000
Maintenance 6,000
Defects 2,000
Expected life 5
Salvage value 0
Depreciation
Initial outlay
Outflows:
Cost
Installation
Inflows
Tax savings
Salvage value
Net IO
Differential outflows Book Profit Cash Flow
Savings:
Reduced salary
Reduced defects
Costs:
Increased maint
Increased dep
Net savings
Taxes
Net cash flow after tax
PROBLEM 10-3A
CAPITAL BUDGETING CALCULATIONS
ROR = 0.15
A)
Payback pd =
B)
Initial Outlay
Year 1
Year 2
Year 3
Year 4
Year 5
NPV =
C)
PI =
D)
IRR =
PROBLEM 10-4A
NEW PROJECT ANALYSIS
Reduction in Labor 35000
Purchase Price 100,000
Installation Fee 5,000
Increase in Inventory 5,000
Life 10
Salvage Value 0
Depreciation
Tax Rate 34%
Required rate of return 15%
A)
Outflows
Purchase Price
Installation Fee
Increased Working Inventory
Net Initial Outlay
B)
Differential Annual Cash Flows (Years 1-9)
Book Profit Cash Flow
Savings:
Reduction in Labor Costs
Costs:
Increased Depreciation
Net savings before taxes
Taxes (.34)
Annual net cash flow after taxes
C)
Terminal Cash Flow (Year 10)
Inflows:
Differential Flow in Year 10
Recapture of Working Capital (Inventory)
Total Terminal Cash Flow
D)
Present Value of Cash Flows
Years 1-9
Year 10
Less Initial Cost
Net Present Value
PROBLEM 10-5A
NEW PROJECT ANALYSIS
Reduction in Labor 150000
Purchase Price 500,000
Training Session Fee 25,000
Installation Fee 5,000
Increase in Inventory 30,000
Life 10
Salvage Value 0
Depreciation
Tax Rate 34%
Required rate of return 15%
A)
Outflows
Purchase Price
Training Session Fee
Installation Fee
Increased Working Inventory
Net Initial Outlay
B)
Differential Annual Cash Flows (Years 1-9)
Book Profit Cash Flow
Savings:
Reduction in Labor Costs
Costs:
Increased Depreciation
Net savings before taxes
Taxes (.34)
Annual net cash flow after taxes
C)
Terminal Cash Flow (Year 10)
Inflows:
Differential Flow in Year 10
Recapture of Working Capital (Inventory)
Total Terminal Cash Flow
D)
Present Value of Cash Flows
Years 1-9
Year 10
Less Initial Cost
Net Present Value
PROBLEM 10-6A
NEW PROJECT ANALYSIS
Reduction in Labor 50,000
Purchase Price 200,000
Training Session Fee 5,000
Installation Fee 5,000
Increase in Inventory 20,000
Life 10
Salvage Value 0
Depreciation
Tax Rate 34%
Required rate of return 10%
A)
Outflows
Purchase Price
Training Session Fee
Installation Fee
Increased Working Inventory
Net Initial Outlay
B)
Differential Annual Cash Flows (Years 1-9)
Book Profit Cash Flow
Savings:
Reduction in Labor Costs
Costs:
Increased Depreciation
Net savings before taxes
Taxes (.34)
Annual net cash flow after taxes
C)
Terminal Cash Flow (Year 10)
Inflows:
Differential Flow in Year 10
Recapture of Working Capital (Inventory)
Total Terminal Cash Flow
D)
Present Value of Cash Flows
Years 1-9
Year 10
Less Initial Cost
Net Present Value
PROBLEM 10-7A
CASH FLOW--CAPITAL BUDGETING CALCULATION
DATA
Old machine
Book value 100,000
Sold 60,000
Years left 5
Depreciation 20,000
New machine
Cost 300,000
Expected life 5
Sold for 50,000
Depreciation
Cash benefits 90,000
Tax rate 34%
ROR 15%
Initial Outlay Book profit Cash Flow
Outflows
Inflows
Tax savings
Salvage value
Net IO
Differential cash flows
Savings: cash savings
Costs: inc de
Net savings before tax
Taxes
Annual net cash flow
Terminal cash flow
Inflow
Diff Cash flow
Salvage flow
Outflow
Taxes due to sale
Total term cash flow
A)
Payback period =
B)
NPV =
C)
PI =
D)
IRR =
PROBLEM 10-8A
CASH FLOW-CAPITAL BUDGETING CALCULATIONS
DATA
Old machine:
Age 5
Cost 50,000
Book value 25,000
Sold 60,000
Depreciation
New machine
Cost 125,000
Expected life 5
Depreciation
Cash savings 45,000
Tax rate 34%
ROR 10%
Initial outlay
Outflows:
Purchase price
Recapture of dep
Total
Inflows:
Salvage value
Net IO
Differential cash flows Book profit Cash flows
Cash savings
Inc dep
Net sav before tax
Taxes
Annual net cash flow
Terminal cash flow
Diff cash flow
Salvage value
Term cash flow
A)
Payback period =
B)
NPV =
C)
'PI =
D)
IRR =
PROBLEM 10-9A
CASH FLOW-CAPITAL BUDGETING CALCULATION
DATA
Old machine
Age 10
Costs 30,000
Book value 10,000
Expected life left 5
Depreciated
Sold 15,000
New machine
Cost 80,000
Expected life 5
Depreciation
Salvage value 40,000
Cash savings 30,000
Tax rate 34%
ROR 20%
Initial outlay
Outflows:
Purchase price
Inc taxes
Total
Inflows:
Salvage value
Net IO
Differential cash flows Book profit Cash flow
Savings
Inc dep
Net savings
Taxes
Annual net cash flow
Terminal cash flow
Inflows:
Differential cash flow
Salvage value
Outflow:
Taxes on sale
Total
A)
Payback period =
B)
NPV =
C)
PI =
D)
IRR =
PROBLEM 10-10A
SIZE DISPARITY RANKING PROBLEMS
ROR 10%
Year Project A Project B
0 -500 -5,000
1 700 6,000
PV =
NPV =
B)
PI =
C)
IRR =
PROBLEM 10-11A
TIME DISPARITY RANKING PROBLEM
DATA
Year Project A Project B
0 -50,000 -50,000
1 15,625 0
2 15,625 0
3 15,625 0
4 15,625 0
5 15,625 100,000
ROR 10%
A) Project A Project B
Payback period =
B)
NPV =
C)
IRR =
PROBLEM 10-12A
UNEQUAL LIVES RANKING PROBLEM
DATA
Year Equip A Equip B
0 -20,000 -20,000
1 12,590 6,625
2 12,590 6,625
3 12,590 6,625
4 6,625
5 6,625
6 6,625
7 6,625
8 6,625
9 6,625
ROR 15%
A) Equip A Equip B
Payback period =
B)
NPV =
C)
IRR =
E)
PV of annuity =
Less: IO
PV of IO at yr. 3 =
PV of IO at yr. 9 =
NPV =
PROBLEM10-13A
(EAAs)
A)
Data
Year Project A Project B
0 -50,000 -50,000
1 20,000 36,000
2 20,000 36,000
3 20,000 36,000
4 20,000
5 20,000
6 20,000
7 20,000
No. of Years 7 3
ROR 10%
Project A
NPV
PVIFA (for 10%, 7 yr.)
EAA
Project B
NPV
PVIFA (for 10%, 3 yr.)
EAA
B)
Project A EEA/.10
Project B EEA/.10
PROBLEM 10-14A
CAPITAL RATIONING
Maximum 12,000,000
Project Cost PI PV OF FUT NPV
A 4,000,000 1.18
B 3,000,000 1.08
C 5,000,000 1.33
D 6,000,000 1.31
E 4,000,000 1.19
F 6,000,000 1.20
G 4,000,000 1.18
`
Combinations Costs NPV
A&B
A&C
A&D
A&E
A&F
A&G
B&C
B&D
B&E
B&F
B&G
C&D
C&E
C&F
C&G
D&E
D&F
D&G
E&F
E&G
F&G
A&B&C
A&B&E
A&B&G
A&E&G
B&C&E
B&C&G
INTEGRATIVE PROBLEM
Old Machine
Depreciation 2,000
Years of dep left 5
Salvage value 25,000
Operator salary 17,000
Maintenance costs 7,000
Defects costs 3,000
New Machine
Purchase price 50,000
Years of straight line dep 5
Salvage value 10,000
Shipping fee 3,000
Installation charge 2,000
Increase in investment 5,000
Maintenance costs 2,000
Defects costs 4,000
Additional borrowing 20,000
Interest rate 10%
Required rate of return 20%
Tax bracket 34%
D)
Purchase price 50,000
Shipping fee 3,000
Installation charge 2,000
Increase in investment 5,000
Unrecognized tax savings
Salvage value of old mach
Initial outlay
E)
Differential Annual Cash Flows (Years 1-4)
Book Profit Cash Flow
Savings:
Reduction in Labor Costs
Reduction in Maintenance
Costs:
Increased Defects
Increased Depreciation
Net savings before taxes
Taxes (.34)
Annual net cash flow after taxes
F)
Terminal Cash Flow (Year 5)
Inflows:
Differential Flow in Year 10
Salvage Value
Recapture of Working Capital (Inventory)
Outflows:
Taxes on sale of new machine
Total Terminal Cash Flow
H)
Initial outlay
Year 1
Year 2
Year 3
Year 4
Year 5
NPV =
I)
IRR =
K)
Year Project A Project B
0 -195,000 -1,200,000
1 240,000 1,650,000
ROR 10%
A B
NPV =
PI =
IRR =
L)
Year Project A Project B
0 -100,000 -100,000
1 32,000 0
2 32,000 0
3 32,000 0
4 32,000 0
5 32,000 200,000
ROR 11%
A B
Payback =
NPV =
PI =
IRR =
M) Replacement Chain
Year Project A Project B Project A
0 -100,000 -100,000 -100,000
1 65,000 32,500 65,000
2 65,000 32,500 65,000
3 65,000 32,500 65,000
4 0 32,500 65,000 -100,000
5 0 32,500 65,000
6 0 32,500 65,000
7 0 32,500 65,000 -100,000
8 0 32,500 65,000
9 0 32,500 65,000
ROR 14%
A B
Payback =
NPV =
IRR =
PV of annuity=
Less: IO=
PV of IO at yr. 3 =
PV of IO at yr. 9 =
NPV =
Project A
NPV
PVIFA
EAA
Project B
NPV
PVIFA
EAA
CHAPTER 10B PROBLEMS
PROBLEM 10-1B
CAPITAL GAIN TAX
DATA
Purchase 40,000
Expected life 10
Salvage value 0
Depreciation 4,000
Selling price 45,000
Tax rate 34%
Years from when purch 5
A)
Taxes =
B)
Selling price 40,000
Taxes =
C)
Selling price 20,000
Taxes =
D)
Selling price 17,000
Taxes =
PROBLEM 10-2B
CASH FLOW CALCULATIONS
DATA
Existing Situation:
Mach operators 24,000
Maintenance 6,000
Defects 5,000
Original cost of old 40,000
Expected life 10
Age 5
Expected salvage 0
Depreciation 4,000
Current salvage value 10,000
Tax rate 34%
Proposed Situation
automated
Cost 55,000
Installation 6,000
Maintenance 6,000
Defects 2,500
Expected life 5
Salvage value 0
Depreciation
Initial outlay
Outflows:
Cost
Installation
Inflows
Tax savings
Salvage value
Net IO
Differential outflows Book Profit Cash Flow
Savings:
Reduced salary
Reduced defects
Costs:
Increased maint
Increased dep
Net savings
Taxes
Net cash flow after tax
PROBLEM 10-3B
CAPITAL BUDGETING CALCULATIONS
ROR = 0.17
A)
Payback pd =
B)
NPV =
C)
PI =
D)
IO =
PROBLEM 10-4B
NEW PROJECT ANALYSIS
Reduction in Labor 70,000
Purchase Price 250,000
Installation Fee 10,000
Increase in Inventory 15,000
Life 10
Salvage Value 0
Depreciation
Tax Rate 34%
Required rate of return 15%
A)
Outflows
Purchase Price
Installation Fee
Increased Working Inventory
Net Initial Outlay
B)
Differential Annual Cash Flows (Years 1-9)
Book Profit Cash Flow
Savings:
Reduction in Labor Costs
Costs:
Increased Depreciation
Net savings before taxes
Taxes (.34)
Annual net cash flow after taxes
C)
Terminal Cash Flow (Year 10)
Inflows:
Differential Flow in Year 10
Recapture of Working Capital (Inventory)
Total Terminal Cash Flow
D)
Present Value of Cash Flows
Years 1-9
Year 10
Less Initial Cost
Net Present Value
PROBLEM 10-5B
NEW PROJECT ANALYSIS
Reduction in Labor 400000
Purchase Price 1,000,000
Training Session Fee 100,000
Installation Fee 50,000
Increase in Inventory 150,000
Life 10
Salvage Value 0
Depreciation
Tax Rate 34%
Required rate of return 12%
A)
Outflows
Purchase Price
Training Session Fee
Installation Fee
Increased Working Inventory
Net Initial Outlay
B)
Differential Annual Cash Flows (Years 1-9)
Book Profit Cash Flow
Savings:
Reduction in Labor Costs
Costs:
Increased Depreciation
Net savings before taxes
Taxes (.34)
Annual net cash flow after taxes
C)
Terminal Cash Flow (Year 10)
Inflows:
Differential Flow in Year 10
Recapture of Working Capital (Inventory)
Total Terminal Cash Flow
D)
Present Value of Cash Flows
Years 1-9
Year 10
Less Initial Cost
Net Present Value
PROBLEM 10-6B
NEW PROJECT ANALYSIS
Reduction in Labor 25000
Purchase Price 100,000
Training Session Fee 5,000
Installation Fee 5,000
Increase in Inventory 25,000
Life 10
Salvage Value 0
Depreciation
Tax Rate 34%
Required rate of return 12%
A)
Outflows
Purchase Price
Training Session Fee
Installation Fee
Increased Working Inventory
Net Initial Outlay
B)
Differential Annual Cash Flows (Years 1-9)
Book Profit Cash Flow
Savings:
Reduction in Labor Costs
Costs:
Increased Depreciation
Net savings before taxes
Taxes (.34)
Annual net cash flow after taxes
C)
Terminal Cash Flow (Year 10)
Inflows:
Differential Flow in Year 10
Recapture of Working Capital (Inventory)
Total Terminal Cash Flow
D)
Present Value of Cash Flows
Years 1-9
Year 10
Less Initial Cost
Net Present Value
PROBLEM 10-7B
CASH FLOW--CAPITAL BUDGETING CALCULATION
DATA
Old machine
Book value 100,000
Sold 60,000
Years left 5
Depreciation 20,000
New machine
Cost 350,000
Expected life 5
Sold for 50,000
Depreciation
Cash benefits 100,000
Tax rate 34%
ROR 15%
Initial Outlay Book profit Cash Flow
Outflows
Inflows
Tax savings
Salvage value
Net IO
Differential cash flows
Savings: cash savings
Costs: inc de
Net savings before tax
Taxes
Annual net cash flow
Terminal cash flow
Inflow
Diff Cash flow
Salvage flow
Outflow
Taxes due to sale
Total term cash flow
A)
Payback period =
B)
NPV =
C)
PI =
D)
IRR =
PROBLEM 10-8B
CASH FLOW-CAPITAL BUDGETING CALCULATIONS
DATA
Old machine:
Age 5
Cost 50,000
Book value 25,000
Sold 60,000
Depreciation 5,000
New machine
Cost 100,000
Expected life 5
Depreciation
Cash savings 35,000
Tax rate 34%
ROR 10%
Initial outlay
Outflows:
Purchase price
Recapture of dep
Total
Inflows:
Salvage value
Net IO
Differential cash flows Book profit Cash flows
Cash savings
Inc dep
Net sav before tax
Taxes
Annual net cash flow
Terminal cash flow
Diff cash flow
Salvage value
Term cash flow
A)
Payback period =
B)
NPV =
C)
'PI =
D)
IRR =
PROBLEM 10-9B
CASH FLOW-CAPITAL BUDGETING CALCULATION
DATA
Old machine
Age 10
Costs 37,500
Book value 12,500
Expected life left 5
Depreciated 2,500
Sold 17,000
New machine
Cost 100,000
Expected life 5
Depreciation
Salvage value 35,000
Cash savings 30,000
Tax rate 34%
ROR 20%
Initial outlay
Outflows:
Purchase price
Inc taxes
Total
Inflows:
Salvage value
Net IO
Differential cash flows Book profit Cash flow
Savings
Inc dep
Net savings
Taxes
Annual net cash flow
Terminal cash flow
Inflows:
Differential cash flow
Salvage value
Outflow:
Taxes on sale
Total
A)
Payback period =
B)
NPV =
C)
PI =
D)
IRR =
PROBLEM 10-10B
SIZE DISPARITY RANKING PROBLEMS
ROR 0.1
Year Project A Project B
0 -650 -4,000
1 800 5,500
PV =
NPV =
B)
PI =
C)
IRR =
PROBLEM 10-11B
TIME DISPARITY RANKING PROBLEM
DATA
Year Project A Project B
0 -50,000 -50,000
1 16,000 0
2 16,000 0
3 16,000 0
4 16,000 0
5 16,000 100,000
ROR 11%
A) Project A Project B
Payback period =
B)
NPV =
C)
IRR =
PROBLEM 10-12B
UNEQUAL LIVES RANKING PROBLEM
DATA
Year Equip A Equip B
0 -20,000 -20,000
1 13,000 6,500
2 13,000 6,500
3 13,000 6,500
4 6,500
5 6,500
6 6,500
7 6,500
8 6,500
9 6,500
ROR 14%
A) Equip A Equip B
Payback period =
B)
NPV =
C)
IRR =
E)
PV of annuity =
Less: IO
PV of IO at yr. 3 =
PV of IO at yr. 9 =
NPV =
PROBLEM 10-13B
(EAAs)
A)
Data
Year Project A Project B
0 -40,000 -40,000
1 20,000 25,000
2 20,000 25,000
3 20,000 25,000
4 20,000 25,000
5 20,000 25,000
6 20,000
7 20,000
No. of Years 7 5
ROR 10%
Project A
NPV
PVIFA (for 10%, 7 yr.)
EAA
Project B
NPV
PVIFA (for 10%, 3 yr.)
EAA
B)
Project A EEA/.10
Project B EEA/.10
PROBLEM 10-14B
CAPITAL RATIONING
Maximum 12000000
Project Cost PI PV OF FUT NPV
A 4,000,000 1.18
B 3,000,000 1.08
C 5,000,000 1.33
D 6,000,000 1.31
E 4,000,000 1.19
F 6,000,000 1.20
G 4,000,000 1.18
`
Combinations Costs NPV
A&B
A&C
A&D
A&E
A&F
A&G
B&C
B&D
B&E
B&F
B&G
C&D
C&E
C&F
C&G
D&E
D&F
D&G
E&F
E&G
F&G
A&B&C
A&B&E
A&B&G
A&E&G
B&C&E
B&C&G
