Capital Budgeting Decisions with Discounted Cash

profilepulzx2d4
81554_1432717_Ch13ExcelwithHW.xlsx
Home>Business & Finance homework help>Accounting homework help>Capital Budgeting Decisions with Discounted Cash

Ch.13 CapX

Chapter 13 Capital Budgeting Excel 1
Cost $ 3,170 data Year $ PV$
Life 4 years 0 $ (3,170) $ (3,170)
Salvage value zero 1 $ 1,000 $ 909
Increase in annual cash inflows AT 1,000 2 $ 1,000 $ 826
given Hurdle rate 10.0% 3 $ 1,000 $ 751
Residual 0.0 4 $ 1,000 $ 683
$ (0) $ (0)
initial [0] 1 2 3 4 Year
Buy Machine (3,170)
Cash inflow 1,000 1,000 1,000 1,000 No outflows
Net cash flow (3,170) 1,000 1,000 1,000 1,000
net nominal cash flow (3,170) 1,000 1,000 1,000 1,000 (0.13)
discounted each year (3,170) 909 826 751 683 3,170
1000/(1+10%)^1 1000/(1+10%)^3
Sum of discounted cash flows + initial (0) 1000/(1+10%)^2 1000/(1+10%)^4
Formula (0.13) =NPV(C6,D13:G13)+C13
Cost of Capital PE on WACC
Excel 2 Additional Future Weighted Cost of Capital
$billion Interst rate PE now earnings
Debt 50 8.0% 0.25 2.0%
Market cap 150 18 14.5 0.75 5.2% Hurdle without risk adjustment
5.6% 6.9% 7.2%
PRETAX basis 7.2%
10.2%
Hurdle Rate 10.2% 70% average cost of capital/ 30% negative 70% Risk adjustment
30% failure success
Risk factors vary: productivity project risk may be lower than new product risk
Lester Cost and revenue information Excel 3
Excel 3 Cost of special equipment $160,000
Working capital required 100,000 Tax
Relining equipment in 3 years 30,000 rate given as
Salvage value of equipment in 5 years 5,000 25%
TAX RATE Annual cash revenue and costs:
CONSIDERS Sales revenue from parts 803,300
DEDUCTION OF Cost of parts sold 400,000
DEPRECIATION Salaries, shipping, etc. 270,000 133,300 profit B4 tax 75% Profitability
EXPENSE Tax Rate = 25% 99,975 Profit after tax index
NOT COVERED $ 260,000 Initial investment
THIS CHAPTER Hurdle rate: 10% $ 161,641 PV
If WC now By hand 62.2%
Period Equipment WC Profit Net Cash Flow PV by Year IRR Proof
0 ($160,000) ($100,000) ($260,000) $ (260,000) $ (260,000)
1 $99,975 $99,975 $ 90,886 =+E47/((1+F$43)^A47) $ 77,108
2 $99,975 $99,975 $ 82,624 $ 59,471
Relining Eqpmnt 3 ($30,000) $99,975 $69,975 $ 52,573 $ 32,104
4 $99,975 $99,975 $ 68,284 $ 35,377
W/C recapture- sales used Eqpmnt 5 $5,000 $100,000 $99,975 $204,975 $ 127,273 $ 161,641 $ 55,941
$ 0
NPV $ 161,641 +E46+NPV(F43,E47:E51) Sum
Excel Function IRR 29.7% +IRR(E46:E51,0.1)
29.7%
DENNY
Excel 4
Project Life: 4 years
Eqpmnt cost $ 250,000 $ (270,000) $ (270,000)
Upgrade Capital $ 90,000 end 2 yrs. Profitability $ 120,000 101141.363626805
Salvage AT $ 10,000 16,667 Before tax @ 40% index $ 30,000 21311.6154922698 Back to PPT 21
Working Capital $ 20,000 $ 270,000 $ 120,000 71849.5283992767 Back to PPT 21
Cash flow $ 120,000 per year assumed AT $ 28,156 $ 150,000 75697.4924817257 Back to PPT 21
Hurdle Rate 14% Min.acceptable rate=Discount Rate one-stream 10.4% $ 0 Back to PPT 21
Nominal $s Back to PPT 21
Cash flow per year Inflow Working Net NPV at IRR Back to PPT 21
Period Outflow Annual Salvage Capital Cash Flow BY hand 18.6% Back to PPT 21
0 $ (250,000) $ (20,000) $ (270,000) $ (270,000) $ (270,000) (270,000) Back to PPT 21
1 $ 120,000 $ 120,000 105,263 101,141 120,000 =+K75/(1+$B$70)^A75 Back to PPT 21
2 $ (90,000) $ 120,000 $ 30,000 23,084 21,312 30,000 =+K76/(1+$B$70)^A76 Back to PPT 21
3 $ 120,000 $ 120,000 80,997 71,850 120,000 =+K77/(1+$B$70)^A77 Back to PPT 21
4 $ 120,000 $ 10,000 $ 20,000 $ 150,000 88,812 $ 28,156 75,697 150,000 =+K78/(1+$B$70)^A78 Back to PPT 21
sum $ 0 Back to PPT 21
NPV @ Hurdle Rate $ 28,156 18.6% $ 150,000 $ 28,156 Check IRR Back to PPT 21
IRR 18.6% +IRR(F74:F78,0.16) +F74+NPV(B70,F75:F78) Back to PPT 21
Hurdle Rate 14% Min.acceptable rate Excel IRR @ IRR % Excel 5
Year by Hand
0 ($104,320) $ (104,320)
1 $20,000 17,544 =+E86/(1+$E$96)^D86 Proof ;=+IRR(E85:E95,0.2)
2 $20,000 15,389 =+E87/(1+$E$96)^D87 Proof 14.0%
3 $20,000 13,499 =+E88/(1+$E$96)^D88 Proof
4 $20,000 11,841 =+E89/(1+$E$96)^D89 Proof
5 $20,000 10,387 =+E90/(1+$E$96)^D90 Proof
6 $20,000 9,111 =+E91/(1+$E$96)^D91 Proof
7 $20,000 7,992 =+E92/(1+$E$96)^D92 Proof
8 $20,000 7,011 =+E93/(1+$E$96)^D93 Proof
9 $20,000 6,150 =+E94/(1+$E$96)^D94 Proof TAX RATE 25%
14% EXCEL "IRR" function 10 $20,000 5,395 =+E95/(1+$E$96)^D95 Proof
=+IRR(E85:E95,.22) 14.0% 0 Verfied
266666.666666667
Quick Check Excel 6
Year Proof by hand
0 $ (79,310) ($79,310)
1 $ 22,000 $19,643
2 $ 22,000 $17,539
3 $ 22,000 $15,660
4 $ 22,000 $13,983
5 $ 22,000 $12,485
IRR 12.0% $0 Check IRR
+IRR(F100:F105,0.15)
12%
CAR
WASH
Excel 7 IRR problem
NOT NPV problem
A !0% not used
(300,000) New Investment (300,000)
(175,000) OLD Investment 40,000
(125,000) Difference (260,000)
B 40,000 OLD sale of Old Net invest
(85,000) NET difference for New
C
Total Cost Approach Incemental Only
Discount Rate 10% OLD NEW New - Old
Term/years 10 10 ∆ Cash flow ∆ Cash flow
Year 0 (175,000) (260,000) -$300K+$40K (85,000) (85,000)
OLD 1 45,000 60,000 15,000 13,636 =+H129/(1+B$126)^B129
Profitability 2 45,000 60,000 Same 15,000 12,397 =+H130/(1+B$126)^B130
index 3 45,000 60,000 60,000 ◄Answer► 15,000 11,270 =+H131/(1+B$126)^B131
$175,000 4 45,000 60,000 (50,000) 15,000 10,245 =+H132/(1+B$126)^B132
$56,348 5 45,000 60,000 10,000 15,000 9,314 =+H133/(1+B$126)^B133
32.2% 6 (35,000) 10,000 replace brushes 45,000 25,401 =+H134/(1+B$126)^B134
7 45,000 60,000 45,000 15,000 7,697 =+H135/(1+B$126)^B135
NEW 8 45,000 60,000 (80,000) 15,000 6,998 =+H136/(1+B$126)^B136 $56,347.61
Profitability 9 45,000 60,000 (35,000) 15,000 6,361 =+H137/(1+B$126)^B137
index 10 45,000 67,000 +$60k + $7k 22,000 8,482 =+H138/(1+B$126)^B138 83,149.133
$260,000 =+IRR(C128:C138,0.15) 17.6% 17.2% Greater NPV 16.4%
$83,149 =+NPV(0.1,C129:C138)+C128 $56,348 $83,149 $26,802 NPV @ 10% $26,802 $ 26,802
32.0% Profitability Index =-C140/C128 32.2% 32.0% NPV/Initial investment
+56348/175000 +83149/260000 NEW=More NPV $s @ rate > disc. Rate 56,348 =+C128+NPV(B126,C129:C138)
Go to Slide # 41
Quick Check
Excel 8
s
Incremental
Nominal Discounted
A - B By Hand
Rate 14% A B ∆ ∆ NPV ∆
0 ($80,000) ($60,000) ($20,000) ($20,000) ($20,000) =+F158/(1+$B$157)^B158
1 $20,000 $16,000 $4,000 $4,000 $3,509 =+F159/(1+$B$157)^B159
2 $20,000 $16,000 $4,000 $4,000 $3,078 =+F160/(1+$B$157)^B160
3 $20,000 $16,000 $4,000 $4,000 $2,700 =+F161/(1+$B$157)^B161
Answer = "b." 4 $20,000 $16,000 $4,000 $4,000 $2,368 =+F162/(1+$B$157)^B162 13.4%
5 $30,000 $24,000 $6,000 $6,000 $3,116 =+F163/(1+$B$157)^B163
IRR 10.9% 13.4% ($5,229)
13.4% NPV ($6,145) ($916) ($5,229) $ 2,000 $ (5,229)
Profitability Index -7.7% -1.5% NPV/Initial investment =+E158+NPV(B157,E159:E163)
Furniture
Excel 9
-21000+9000
Incremental
Rate BETTER Old New ∆ NPV
10% Old New ∆ PV/year PV/year PV/year
0 ($4,500) ($12,000) $7,500 ($4,500) ($12,000) $7,500 =+D183/((1+$A$182)^$A183)
1 ($10,000) ($6,000) ($4,000) ($9,091) ($5,455) ($3,636) =+D184/((1+$A$182)^$A184)
2 ($10,000) ($6,000) ($4,000) ($8,264) ($4,959) ($3,306) =+D185/((1+$A$182)^$A185)
3 ($10,000) ($6,000) ($4,000) ($7,513) ($4,508) ($3,005) =+D186/((1+$A$182)^$A186)
4 ($10,000) ($6,000) ($4,000) ($6,830) ($4,098) ($2,732) =+D187/((1+$A$182)^$A187)
5 ($9,750) ($3,000) ($6,750) ($6,054) ($1,863) ($4,191) =+D188/((1+$A$182)^$A188)
NPV function excel less cost discounted by year
NPV ($42,253) ($32,882) ($9,371) $ (42,253) $ (32,882) $ (9,371)
Go to Slide # 45
BAY
Excel 10
Rate 14% $34,320 $ (100,000)
Needed return $34,320 14%
+PMT(F197,A207,D203) 4
+pmt(rate, nper,pv] $34,320 ($34,320.48)
rate = 14%, Nper=4, pv = ($100K) PMT function
answer = "c."
PV$ PV$
Year Tangible Intangible Total PV$ Tangible Intangible Proof
0 $ (100,000) $ - 0 $ (100,000) Nominal $ (100,000) at 14% at 14% $34,320.48 =+NPV(G216,L205:L224)
1 $ 10,000 24,320.48 $34,320 Needed return $ 30,106 $ 8,772 $ 21,334 $1,040,000.00 $s
2 $ 10,000 24,320.48 $ 34,320 Needed return $ 26,408 $ 7,695 $ 18,714 1 0
3 $ 10,000 24,320.48 $ 34,320 Needed return $ 23,165 $ 6,750 $ 16,416 2 0
4 $ 10,000 24,320.48 $ 34,320 Needed return $ 20,320 $ 5,921 $ 14,400 3 0
Proof $ (60,000) $ 97,282 14.0% IRR $ 100,000 $ 29,137 $ 70,863 4 0
$0.00 NPV 5 0
6 0
Need TANKER Excel 11 7 0
Salvage 8 0
to be Pv of project End salvage value = $1040,000 9 0
$1,040,000 Negative PV without salvage $ 1,040,000 10 0 1,040,000
to meet 20 Years 11 0 20
12% 12% hurdle rate 12 0 12.0%
requied PV x (1 + rate)^years $ 10,032,145 1.12 to the 20th power x shortage 13 0 10,032,145
Hurdle Rate Future value of $ 1,040,000 after 20 years 14 0
What future vale has a PV of $1,040,000 +G214*(1+G216)^G215 15 0
16 0
Excel 12 Daily Grind Discounted 14% 17 0
Cash flows ∑ Non-Disc.cash flow Discounted cash flow ∑ discounted cash flow Discount rate 14% 18 0
0 $ (140,000) $ - 0 $ (140,000) $ - 0 19 0
1 $ 35,000 $ (105,000) $ 30,702 $ (109,298) 20 $ 10,032,145
2 $ 35,000 $ (70,000) $ 26,931 $ (82,367)
3 $ 35,000 $ (35,000) $ 23,624 $ (58,743)
4 $ 35,000 $ - 0 $ 20,723 $ (38,020) $ - 0
5 $ 35,000 $ 35,000 $ 18,178 $ (19,842) $ 35,000
6 $ 35,000 $ 70,000 $ 15,946 $ (3,897)
7 $ 35,000 $ 105,000 $ 13,987 $ 10,091 ($3,897)
8 $ 35,000 $ 140,000 $ 12,270 $ 22,360 $13,987
9 $ 35,000 $ 175,000 $ 10,763 $ 33,123 0.28
10 $ 35,000 $ 210,000 $ 9,441 $ 42,564
4.00 Years 6.28
Excel 13 Discounted
Period Given Data Cash flows ∑ non-Disc.cash flow Discounted cash flow ∑ discounted cash flow
0 ($4,000) $0 ($4,000) $0
1 $1,000 ($3,000) $877 ($3,123)
2 $0 ($3,000) $0 ($3,123)
3 $2,200 ($800) $1,485 ($1,638) ($572)
4 $1,800 $1,000 $1,066 ($572) $779
5 $1,500 $2,500 $779 $207 0.73
3.44 Years 4.73
($800) Non-discounted Discounted
$1,800 aka nominal $ +PV(rate, nper, amt)
(0.44) =+PV(14%,5,100)
($343.31)
Discount rate 14%
Excel 14 Tax rate 40.0% since we buy with AT $, savings & income must be AT
Tax effect of depreciation not considered
Discount Rate 14.0%
Project Life 10 Years
Units produced 1 2 3 4 5 6 7 8 9 10
15,000 19,000 23,000 27,000 31,000 35,000 39,000 43,000 47,000 28,000
Alternative 1
Buy a smaller second machine to the one already in use
two machines 180,000 cost second new machine
200,000 replacement current old machine in 5 yrs.
1,800 maintenance cost = $3000 each machine per year 9 yrs
100,000 after 5 years, second machine residual value 100
15,000 residual value of existing old machine when 2nd machine purchase in 5 yrs. 8%
199.90
Alternative 2 BIG better machine
buy big more efficient model 375,000 Cost big machine
sell existing used machine 35,000
maintained per year 13,000
Savings per unit with better machine $ 1.39
residual of new machine 50,000 after 10 years
Units 15,000 19,000 23,000 27,000 31,000 35,000 39,000 43,000 47,000 28,000
Discount rate 14.0%
Period:► initial [0] 1 2 3 4 5 6 7 8 9 10
Alternative 1
second machine (180,000)
replace first machine (200,000)
Residual value 15,000 100,000
maintenance (2,160) (2,160) (2,160) (2,160) (2,160) (2,160) (2,160) (2,160) (2,160) (2,160)
net nominal cash flow (180,000) (2,160) (2,160) (2,160) (2,160) (2,160) (187,160) (2,160) (2,160) (2,160) 97,840
discounted each year (180,000) (1,895) (1,662) (1,458) (1,279) (1,122) (85,268) (863) (757) (664) 26,392
Sum of discounted cash flows + initial (248,576)
Formula (248,576)
Discount rate 14.0%
Period:► initial [0] 1 2 3 4 5 6 7 8 9 10
Alternative 2
second machine (375,000)
sell existing machine 35,000
residual of new machine 50,000
Savings or less cost per unit 12,510 15,846 19,182 22,518 25,854 29,190 32,526 35,862 39,198 23,352
maintenance (7,800) (7,800) (7,800) (7,800) (7,800) (7,800) (7,800) (7,800) (7,800) (7,800)
net nominal cash flow (340,000) 4,710 8,046 11,382 14,718 18,054 21,390 24,726 28,062 31,398 65,552
discounted each year (340,000) 4,132 6,191 7,683 8,714 9,377 9,745 9,881 9,837 9,655 17,682
Sum of discounted cash flows + initial (247,103)
Formula (247,103) no difference
Change rate
Excel 15
Inflation, FX, etc. not considered
No consideration to tax effect of salvage
would have to be considered - complicating calculations
Discount rate 12.0% tax rate 30%
Period:► 0 1 2 3 4 5 6 7 8 9 10
Ref#
Cost of equipment (300,000) 100,000 A
Working Capital (75,000) 75,000 B
Capitalized road maintenance - 0 - 0 - 0 - 0 - 0 (40,000) C
Nominal each yaer (375,000) - 0 - 0 - 0 - 0 - 0 (40,000) - 0 - 0 - 0 175,000
discounted each year (375,000) - 0 - 0 - 0 - 0 - 0 (20,265) - 0 - 0 - 0 56,345 Sum 1
D
Sales net of expense = pre tax income 130,000 130,000 130,000 130,000 130,000 130,000 130,000 130,000 130,000 130,000 E
SL tax exp. allowance for Depreciation (30,000) (30,000) (30,000) (30,000) (30,000) (38,000) (38,000) (38,000) (38,000) (38,000) F
Pre-tax Income 100,000 100,000 100,000 100,000 100,000 92,000 92,000 92,000 92,000 92,000 G
taxes paid 30,000 30,000 30,000 30,000 30,000 27,600 27,600 27,600 27,600 27,600 H
Cash Income +E-((F-E)*tax rate) 100,000 100,000 100,000 100,000 100,000 102,400 102,400 102,400 102,400 119,600 I
J
net nominal Cash income cash flow 100,000 100,000 100,000 100,000 100,000 102,400 102,400 102,400 102,400 102,400 K
discounted each year 89,286 79,719 71,178 63,552 56,743 51,879 46,321 41,358 36,926 32,970 Sum 2
=+E338/(1+$C325)^E326
Sum 1 + Sum 2 (375,000) 89,286 79,719 71,178 63,552 56,743 31,614 46,321 41,358 36,926 89,315
Sum of discounted cash flows + initial 231,011 Sum 1 + Sum 2 By hand
Formula 231,011 =+C332+NPV(C325,D331:M331)+NPV(C325,D340:M340)
3
4 Excel 15
5
X Y
100000 100000
8%
X Y X Y sum
100000 100000 (100,000)
60000 60000 1 55,556 55556 -44444
40000 35000 2 34,294 30007 -14438
25000 3 - 0 19846 5408 -0.727488 3.73
25000 4 - 0 18376 23784
25000 5 - 0 17015 40799
25000 6 - 0 15754 56553
25000 7 - 0 14587 71140
25000 8 - 0 13507 84647
25000 9 - 0 12506 97153
25000 10 - 0 11580 108733
89,849 108,733
No pay back
12% by hand
1 60,000 53,571.43
2 60,000 47,831.63 =+PV(B355,A360,B356)
3 60,000 42,706.81 ERROR:#REF!
4 60,000 38,131.08
5 60,000 34,045.61
$ 216,287
14% by hand
0 ($343.31) Excel "PV" function
1 $100 87.72
2 100 76.95
3 100 67.50
4 100 59.21
5 100 51.94
$ 343.31
P r o o f
end period Beginning interest Withdrawal End
1 $343.31 $48.06 ($100.00) $291.37
2 $291.37 $40.79 ($100.00) $232.16
3 $232.16 $32.50 ($100.00) $164.67
4 $164.67 $23.05 ($100.00) $87.72
5 $87.72 $12.28 ($100.00) $0.00
DEFINITIONS
1 Accounting Rate of Return = Simple Rate of Return = Average return for periods being examined divided by Average investment for that period
2 Compound Interest Interest earned on investment and on interest previously earned [ interest on interest]
3 Discount Rate Rate used to Reduce [Discount[ Future Cash Flows; Can be WACC; WACC adjusted for Risk: Incremental cost or Cost specific to the Project
4 Discounted Cash Flow = DCF= future cash flows reduced to Present Value Using a Discount Rate
5 Hurdle Rate Discount /rate which includes factor for success ratio on projects; e.g. 70% success rate then increase WACC by 3/7
6 Internal Rate of Return =IRR= computed Rate applied to future cash flow such that the sum of initial investment and future cash flows = zero
7 Net Present Value =NPV=Present value reduced by initial investment
8 Nominal Dollars Non-discounted $s; spending/savings/returns without discounting
9 Payback Period Using DCF or using nominal $then the period of time with discount $s that the future cash flows = initial investment.
10 Present Value =PV=The current value of future Cash flows reducing by selected Discount Rate
11 Profitability Index NPV divided by Initial Investment
12 Salvage Value = Residual Value = RESALE =Amount expected to be resceived from sale/trade-in of intial capital investment item[s]
13 Weighted Average Cost of Capital =WACC= Cost of Capital=Average of the Cost of Debt [Interest after tax and of Cost of Equity [usually through PE Ratio
14 Working Capital Current Assets less Current liabilities
Simple Example
$1,000 Capital Expenditure Residual = 0
10% Discount Rate= Hurdle Rate
period Returns Rate
0 Nominal DCF
1 $400 $364 $400/(1+discount Rate) to # of years power=$400/(1+10%)^1
2 $450 $372 $450/(1+discount Rate) to # of years power=$450/(1+10%)^2
3 $500 $376 $500/(1+discount Rate) to # of years power=$500/(1+10%)^3
$1,350 $1,111
$1,111 $111.19
PV Future CF--DCF $1,111 ($1,000)
NPV--DCF $111 $111
$1,000 Average investment
$450 Average nominal $ Return
Accounting Rate of Return 45.0%
$111 NPV
Profitability Index 11.1% $1,000 Initial Investment
1 2 3 ◄Year
Payback Period Years $400 $450 $500
Nominal $s 2.30 $400 $450 $150 $1,000
$364 $372 $376
DCF 2.70 $364 $372 $264 $1,000
Capital Expenditure ($1,000) DCF at
IRR Year Nom.Return 16.0% Discounted
1 $400 $344.90 at
2 $450 $334.57 IRR
3 $500 $320.53 =
IRR 16.0% $1,000.00 Initial
Proof Investment
16%

HCT---&P of &N---&D,&T---&F,&A

•Decker Company can purchase a new machine at a cost of $104,320 that will save $26667 per year in cash operating costs. = $20000 AFTER TAX •The machine has a 10-year life.

How large would the salvage value need to be ?

Should Holland open a mine on the property?

Consider the following two investments: Project X Project Y Initial investment $100,000 $100,000 Year 1 cash inflow $60,000 $60,000 Year 2 cash inflow $40,000 $35,000 Year 3-10 cash inflows $0 $25,000 Which project has the shortest payback period? a. Project X b. Project Y c. Cannot be determined Discount rate = 8%

•Decker Company can purchase a new machine at a cost of $104,320 that will save $20,000 per year in cash operating costs. •The machine has a 10-year life.

taxes

after taxes

Proof

$22000 AFTER TAX

CASH INFLOW AFTER TAX

CASH INFLOW AFTER TAX

OP.COST AFTER TAX

@10%

@10%

Both have DCF > Discount rate

Equal Cash Flows in Susequent Periods

Unequal Cash Flows in Susequent Periods

HW

Rider University: HCTamburro
ACC220
Chapter 13 CapX
Problem A: Compute:
NPV BT=before tax
IRR AT=after tax
Simple rate of Return To make BT = AT mutply BT by [1- tax rate], e.g., 30% tax multply by 70%
Profitability Index
Remember to recapture Salvage
Data Set and
Buy Machine 410,000 Working capital at Project end period
Project life 6 years for NPV,IRR, and Simple
Residual of machine 60,000 get at end year 6 ignore tax on residual
Working capital needed at beginning 45,000 get back in last year ignore tax on WC
Saving: # of employees 3
Total compensation each per year 61,000 this amount is B4 tax EACH-use AT $ for savings & expenses
Effect of depreciation on Cash ignore depreciation
maintenance expense BT yr2 & yr4 25,000 this amount is B4 tax -use AT $ for savings & expenses
tax rate 40% need to compute after tax % then that % times B4 tax as appropriate
Discount rate 11%
Problem B Using changes only method, compute which
option is better BT=before tax
AT=after tax
Keep Old Get New To make BT = AT mutply BT by [1- tax rate], e.g., 30% tax multply by 70%
Cost of new 118,000
Refurbishment cost 30,000 convert to AT
Annual maintenance 20,000 10,000 convert to AT
tax rate 30% 30%
saving with new per year N/A 48,000 20,000 10,000
Discount rate 11% 70% 70%
sale of old now 19,000 This is AT 14,000 7,000
Sale of old at project end 11,000 don't consider taxes (14,000) (7,000)
Sale of new at project end 22,000 don't consider taxes
number of years to consider 8 8 48,000
end year 4 new machine refurbishment 30,000 this is an expense convert to AT 70%
extra supplies needed at beginning 7,000 get back at end [last year] 33,600
(118,000)
19,000
(7,000) NEW Change
Old New
0 (30,000) (106,000)
1 (20,000)
2 (20,000)
3 (20,000)
4 (20,000)
5 (20,000)
6 (20,000)
7 (20,000)
8 (9,000)

Sheet1

Cost $ 3,170
Life 4 years
Salvage value zero
Increase in annual cash inflows 1,000

Sheet2

Sheet3

Cost $3,170

Life4 years

Salvage valuezero

Increase in annual cash inflows 1,000

Sheet1

Cost and revenue information
Cost of special equipment $ 160,000
Working capital required 100,000
Relining equipment in 3 years 30,000
Salvage value of equipment in 5 years 5,000
Annual cash revenue and costs:
Sales revenue from parts 803,300
Cost of parts sold 400,000
Salaries, shipping, etc. 270,000
&A
Page &P

Cost and revenue information

Cost of special equipment $160,000

Working capital required100,000

Relining equipment in 3 years30,000

Salvage value of equipment in 5 years5,000

Annual cash revenue and costs:

Sales revenue from parts803,300

Cost of parts sold400,000

Salaries, shipping, etc.270,000

Sheet1

Cash flow information
Cost of computer equipment $ 250,000
Working capital required 20,000
Upgrading of equipment in 2 years 90,000
Salvage value of equipment in 4 years 10,000
Annual net cash inflow 120,000
&A
Page &P

Cash flow information

Cost of computer equipment $ 250,000

Working capital required20,000

Upgrading of equipment in 2 years90,000

Salvage value of equipment in 4 years10,000

Annual net cash inflow120,000

Sheet1

Install the New Washer
Year Cash Flows 10% Factor Present Value
Initial investment Now $ (300,000) 1.000 $ (300,000)
Replace brushes 6 (50,000) 0.564 (28,200)
Net annual cash inflows 1-10 60,000 6.145 368,700
Salvage of old equipment Now 40,000 1.000 40,000
Salvage of new equipment 10 7,000 0.386 2,702
Net present value $ 83,202
&A
Page &P

Install the New Washer

Year

Cash

Flows

10%

Factor

Present

Value

Initial investmentNow(300,000)$ 1.000 (300,000)$

Replace brushes6 (50,000) 0.564 (28,200)

Net annual cash inflows1-1060,000 6.145 368,700

Salvage of old equipmentNow40,000 1.000 40,000

Salvage of new equipment10 7,000 0.386 2,702

Net present value83,202$

Sheet1

Cost of equipment $ 300,000
Working capital needed $ 75,000
Estimated annual cash receipts from ore sales $ 300,000
Estimated annual cash expenses for mining ore $ 170,000
Cost of road repairs needed in 6 years $ 40,000
Salvage value of the equipment in 10 years $ 100,000
After-tax cost of capital 12%
Tax rate 30%

Sheet2

Sheet3

Cost of equipment $ 300,000

Working capital needed $ 75,000

Estimated annual cash

receipts from ore sales

$ 300,000

Estimated annual cash

expenses for mining ore

$ 170,000

Cost of road repairs

needed in 6 years

$ 40,000

Salvage value of the

equipment in 10 years

$ 100,000

After-tax cost of capital

12%

Tax rate 30%

12345$1,000$0$2200$1800$1500

When the cash flows associated with an investment project change from year to year, the payback formula introduced earlier cannot be used.

Instead, the un-recovered investment must be

tracked year by year.

DeductMethod

TAX RATE

CONSIDERS

DEDUCTION OF

DEPRECIATION

EXPENSE

NOT COVERED

THIS CHAPTER