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Chapter 11 Solutions PDF

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69 views11 pages

Chapter 11 Solutions PDF

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4 INTEGRATED PRB TET a ‘S The Board of Directors of National Brewing Inc, is considering the acquisition of a new Sul. ‘The stil is priced at $600,000 but would require $60,000 in transportation costs and $40,000 for installation. ‘The stil has useful life of 10 years but will be depreciated over its S-year MACRS life. I is expected to have a salvage value of $10,000 at the end of 10 years. The still would inerease revenues by $120,000 per year and increase yearly Operating costs by $20,000 per year. Additionally, the still would require a $30,000 increase in net working capital. The firm's marginal tax rate is 40 percent, and the Project's cost of capital is 10 pervent, What is the NPV of the still? a. $18,430 b, $12,352. -$65,204 di. -$130,961 e. -$203,450 (The following data apply to the next three Self-Test Problems.) As the capital budgeting director of Union Mills Inc. you are analyzing the replacement of an automated loom system. ‘The old system was purchased 5 years ago for $200,000; it falls into the MACRS 5-year class; and it has 5 years of remaining life and a $50,000 salvage value five years from now. The current market value of the old system is $100,000. The new system has a price of $300,000, plus an additional $50,000 in installation costs. ‘The new system falls into the MACRS 5-year class, has a 5-year economic life, and a $100,000 salvage value. ‘The new system will require a $40,000 increase in the spare parts inventory. ‘The primary advantage of the new system is that it Will decrease operating costs by $40,000 per year. Union Mills has a 12 percent cost of capital and a marginal tax rate of 35 percent. 4. What is the net cash investment at Year 0? a. $350,000 b. $320,800 «$295,000. $40,000 e. $23,200 5. What is the annual net operating cash inflow in-Year 1? a. $46,300 b. $43,950 e. $39,825 d._ $33,350 e. $50,200 \\— 6 What is the net cash flow in the final year (Year 5)? a. $31,360 b. $43,060 ce $119,325 d. $121,930 —e._ $117,200 -9 offset one another so as to leave expected costs and cash flows conser over time. What is the NPV of the better project, that is, how much (in millions) will the betece project add to Central City’s total value? a, $17.83 b. $21.63 c. $20.03 d. $24.70 e. $19.57 Uf-3 Aleks! Brewing Lncheol Ovdley 9 t2 6 Acquire still il se 4 trons < a Eee < 19, oy + \nce NWC oo = ae < 139, > Tarm Ye CE geet SV Selling erie’) -BYV = Taxable gain XR Tex @& Yo? + Return of wwe Deerec fe op cr oo, a0 = Deprecisble End of Yr lv — 10, 009 # ¢F o 1 @D — Yow +e) + 30,000 * CF Tecm. e CF Egg, 600 Adi Op Che 4° Goz000 NCFio Solera ‘As the capital budgeting director of Union Mills Inc. you are analyzing the replacement of ‘an automated loom system. ‘The gid system was purchased,3_years ago for S2Q0,000; it falls into the MACRS S.year class, and it has Guyears of remaining life and a $50,000 salyage value fie yepts from now. ‘The cutent market value of the old system is guano, ‘The new system has a price of $300,000, plus an additional $30,000 in installation costs. ‘The new system falls into the MACRS.S-year class, has a Saga coongmig life, and a $100,000 salvage value. The new system will require a $40,000 ingrggge in the spare parts igyentory. The primary advantage of the new system is that it will decrease operating costs by $40,000 per year. Union Mills has a 12 percent cost of page capital and a marginal tax rate of 35 percent. dot, 32,19, 46 ‘What is the net cash investment at Year 0? a. $350,000 b. $320,800. $295,000 d. $40,000 e. $23,200 5. Whatis the annual net operating cash inflow in Year 1? a, $46,300 b. $43,950 ec. $39,825 d. $33,350 e. $50,200 ‘What is the net cash flow in the final year (Year 5)? a. $31,360 b. $43,060 © $119,325 d. $121,930 e._- $117,200 y - CE. Price New C38, o> — lnstel! ¢ 50,08 ate od . Sale of old too, oe + Cost = ov, 00 -w = 12,000 AAACRS Dep, .06 Gain - Taxable BB, vee RB (2, oes 4 CEs From Op? NL CFs 2 a —— @. ueals on Wings te. supplies prepared meals for corporate aircraft (as opposed to public commercial airlines), and it needs to purchase new broilers. Tf the broilers are (Ag Perchased, they will’ replace old broliera pnrchased 10 years aco fez #109, 00 and which increase its revenues by $18,000 per year if the new broilers are purchased, but cash If the firm's cost of capital is 10 expenses will also increase by $2,500 per y percent and its tax rate is 38 percent, what is the NEV of the broilers? a. -$60, 644 b. $17,972 + $28,451 d. ~$44,553, require Replacement decision eae, ee eae Oe Weta nae wee 3 a Cc a ee | = Lacie rie BUS ma ae a aa ie i sMehegs , ee oS Pe aa dare eee sac BERR ce oy anon Fe Se nn b pout New project NPV Stanton Lo Time Line: . carr erasea 2 3 ’ 5 Yeas ae ee ees Cr a i cd aa MACE —_Dapueciabe Anna Depreciation eash Flows i epreiable mga vor Betsem _“Sasie Depteviation 1 oa 10000 z oe 40,000 5 og ig000 4 o2 #0000 : on $0000 80 $000 Project anahsis worksheet: 1 nttahoutan Yee —O— TMaehine cost ($40,000) 2) Decrease inNWC 3) Total neti. ia) Operating cashflows 4} ine.ineamings before deprec. tax _-$ 8.000 $ 6.000 $ 6,000 $ 6.900 + 6.000 5) After-taz inetease in earings fine $10.6) 3.800 3600 2600 3600 3.800 65) Before tex reductionin cost 900 5000 5900 5000 5000 7) Alter tax reduction in cost (ine 60.6} 3900 3.900 3000 3.000 8) Depiec. {rom table) Bon e00 7600 4800 4400 4) Depiec. tax savings fine 8x0.) 5120 3040 _ 1820 _1760 10) Net operating CFstine-7-8) --$ 3800 SE nran $ aso § 0520 $ 2960 Terminal yeat CFs 11) Estimated salvage value $10,000 12} Tax on zalvage vatue (10,000 -2400)(0.4) 080) 13} Retum of NWC =~ 14) Total termination CFs E350 WV Necrs 15) Total Net CFs 00D) Pom Pia Tye Fase FE Tabular solution: NEV + $40,000 +$.9800 (PVF 9:1) + $1720 (PViFY~2) + $9540(P¥IF 922) + $8520 [P¥iF¥.4) - $16,920 (PVIF es) ‘$40,000 + $9:200 (0.9174) + $11720 (0.8617) + $8:640(07722), + 58.520 (0.7084) + $15,370 (0.6488) =$223129 w» $2292 Financial ealeulatcr solution: Input: CFy= -40,000; CF, = $800: CR Fa = 8520; CF = 6.2201 = 9 Output: NPV = $2310 ve $2,292. 1.720; CF, = 8840: Ch, 14 Cash Flow Estimation 1-I3ED ‘Bighee Bottling Company is contemplating the replacement one, ‘The old machine has a book value of 9600,000 and remaining use! return from scrapping the old machine in Years, {s being depreciated toward a zero salvage valve, or by ‘but it cam sell it now to another frm in the industry for $2 $120,000 per year using the stright line method. of one of its botiing machines with 2 newer and more efficient firm does not expec o realize ay 165,000. The old machine Ley mnuchrine can be purchased for St,175,000, a estimated uso life and class life of 5 years, and an otimated salvage value of $145,000. MACRS 5-year clas rates:20%, 32%, 19%, 12%, WY Tis expected to economize on aaamic poner age, labor, and Tepsix cost, a8 well sto reduce the numberof defective ‘in total, an annual savings of $255,000 willbe realized ifthe new machine i installed. The company’s ‘marginal tax rate is 35% and it has 12% cost of capital. ‘Should the firm purchase the new machine? ae on ae trey 324 ao Te Ricnze aie oH ae Ney av = “60Y wich, 2 81,175,000 90% 8 4¢ canniniay je wont > vl lest 3 % zal nw 0 43,5,” Sas nS $355, wary, yell in Ty cost svn93 = ‘ Pee eee 2 Bn a er pcemnt poe 1 og Tei TAG “outea” Fe cot me SI 11590) «> aq sell 420500 *F Ry sl — 600, 000 at -eRpreO Joss ood S335 ony tag becky lures. = Netoutley 192,92 so” e TeRmuas ce , Tae a Dag. te “ i BV NY y (17528 ‘ ‘ Gud ane 7 we x THO 5 ~ CK . Taam XE a rt & ‘4 be a FRR P06 aah (co er AID rues va See anne ine Wears Sucre Ww ~- BVdd - “TonaVh Gab ae : a Ly 070% i; L% sa, Cares ecm Ve Chae OW a

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