LP 7 Assignment

Chapter 12

3. Assume a firm has earnings before depreciation and taxes of $500,000 and no depreciation. It is in a 40 percent tax bracket.  

a.) Compute its cash flow.

b.) Assume it has $500,000 in depreciation. Recompute its cash flow.

c.) How large a cash flow benefit did the depreciation provide?

6. Assume a $200,000 investment and the following cash flows for two products:

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Year                    Product X                    Product Y

1……………….    $60,000                         $40,000

2……………….      90,000                           70,000

3……………….      50,000                           80,000

4……………….      40,000                           20,000

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     Which alternative would you select under the payback method?

11. You buy a new piece of equipment for $11,778, and you receive a cash inflow of $2,000 per year for 10 years. What is the internal rate of return?

18. The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $45,000. The annual cash flows have the following projections:

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Year                    Cash Flow

1……………           $15,000

2……………             20,000

3……………             25,000

4……………             10,000

5……………               5,000

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a.) If the cost of capital is 10 percent, what is the net present value of selecting a new machine?

b.) What is the internal rate of return?

c.) Should the project be accepted? Why?