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Chapter 10: Developing Project Cash Flows Generating Net Cash Flows 10.1 0 123456 Income Statement Revenues $35,000 $35,000 $35,000 $35,000 $35,000 $35,000 Expenses O&M $12,000 $12,000 $12,000 $12,000 $12,000 $12,000 Depreciation $13,000 $20,800 $12,480 $7,488 $7,488 $3,744 Taxable Income $10,000 […]

• PW of tax credit (shield) on depreciation and interest: n Dn In Sum Combined tax savings 1 $66,660 $20,000 $86,660 $34,664 • PW of net proceeds from sale: Total depreciation amount= $200,000 Book value= $0 Salvage= $20,000 Taxable Gain= […]

10.23 (a) and (b) Investment Activities: Investment (150,000)$ Salvage 10,000$ Gains Tax (4,000)$ Financing Activities: Borrowed funds 50,000$ Principal repayment (4,372)$ (4,809)$ (5,290)$ (5,819)$ (6,401)$ (7,041)$ (7,746)$ (8,520)$ Net Cash Flow ($100,000) $23,402 $29,347 $24,955 $21,743 $19,374 $19,112 $18,836 $21,845 […]

Rate of Return Analysis under Inflation 11.26 0 1 2345678 Income Statement Revenue $22,000 $22,000 $22,000 $22,000 $22,000 $22,000 $22,000 $22,000 Expenses: O&M 9,500$ 9,500$ 9,500$ 9,500$ 9,500$ 9,500$ 9,500$ 9,500$ Depreciation 8,860$ 15,184$ 10,844$ 7,744$ 5,537$ 5,530$ 5,537$ 2,765$ […]

Chapter 11 Inflation and Its Impact on Project Cash Flows Measure of Inflation 11.1 11.3 (a) Average price index 4 411.21(1 ) 455.63 2.5976% f f += = (b) 11.4 100(1 0.05)(1 0.08) 113.40 100( / , , 2) 113.40 […]

You may be willing to pay up to $218,499.9 to know the true state of nature. (b) • Joint / marginal probabilities: Survey says Marginal Probability High Medium Low High 0.21 0.075 0.015 0.3 • Conditional probabilities: Survey says High […]

• The break–even rental: 12.14 Let X denotes the additional annual revenue (above $14,000) for model A that is required to break even. • Generalized cash flow for model A: Cash flow elements End of Year 0 1 2 3 […]

Chapter 12: Projects Risk and Uncertainty Sensitivity Analysis 12.1 (a) Project cash flows based on most-likely estimates: 0 1 2 3 Income Statement Labor Savings $45,000 $45,000 $45,000 Depreciation 20,000 32,000 9,600 Taxable Income $25,000 $13,000 $35,400 Income Tax (40%) […]

Compound Options 13.23 • Compound option parameters 0 V 1 I 2 I 1 T 2 T r σ $32.43 $10 $30 1 3 0.06 0.5 • Decision tree for a scale-down option through one-year time increment. 19.77 Invest $10 […]

Chapter 13: Real-Options Analysis Financial Options 13.1 •Define the option parameters for the call option. S0K T r σ $120 $150 0.5 0.06 0.45 The value of the call option is $6.97 by Black-Scholes equation. Stock price (S 0 ) […]

After-Tax Opportunity Cost of Keeping the Defender now: Note that the cost of retaining the defender on after-tax basis is $8,285, instead of $7,700. The scheduled depreciation amount during the fourth year of ownership with a 7–year MACRS property is […]

14.42 Defender analysis (a) and (b): Keep the defender for three years.  Defender: Tax Rat e 35% I nvest ment $12, 725 MA R R 18% Book val ue $15, 000 Per mi t t ed Annual Depr eci […]

Chapter 14: Replacement Decisions Sunk Costs, Opportunity Costs, and Cash Flows 14.1 (a) Sunk cost = $12,000- $2,000 = $10,000. (b) Opportunity cost = $2,000. 14.2 (a) Purchase cost = $15,000, market value = $6,000, sunk cost = $15,000 – […]

Chapter 15 Capital-Budgeting Decision Methods of Financing 15.1 (a) Equity Financing: Let X denote the number of shares to be sold. The total flotation cost would be (b) Equity Financing: flotation cost = $10,000,000 $10,000,000 $193,680 1 0.019 −= − […]

– Prevention of rust on vehicles: resulting in lower repair and maintenance costs and higher resale value of vehicles. – Prevention of corrosion to utility lines and damages to water supplies: resulting in lower utility rates. – Prevention of damages […]

Chapter 2: Accounting and Financial Decision Making Financial Statement 2.1 (a) •Current assets = $150,000 + $200,000 + $150,000 + $50,000 + $30,000 = $580,000 2.2 (a) Working capital = Current assets – Current liabilities; Working capital requirements = Changes […]

Chapter 3: Interest Rate and Economic Equivalence Types of Interest 3.1 • Simple interest: 3.2 • Simple interest: (0.10)($10,000)(5) $5,000I iPN= = = • Compound interest: [(1 ) 1] $10,000(1.6105 1) $6,105 N IP i= + −= −= 3.3 • […]

Chapter 4 Understanding Money and Its Management Nominal and Effective Interest Rates 4.1 • Nominal interest rate: 4.2 (a) Monthly interest rate: 17.85% 12 1.4875%i= ÷= Annual effective rate: 12 (1 0.014875) 1 19.385% a i= + −= (b) 2 […]

• Monthly payment: 55.965$)360%,75.0,/(000,120$ == PAA • Balance at the end of 5 years ( 60 months): 60 $965.55( / ,0.75%,300) $115,056.50B PA= = • Realized equity = sales price – balance remaining – sunk equity: $185,000 – $115,056.60 – […]

Chapter 5: Present-Worth Analysis Identifying Cash Inflows and Outflows 5.1 Revenue = $45 (0.40)(5,000) 5 $450, 000××= (No. of engineer:5) n Inflow Outflow Net flow 0 $500,000 -$500,000 5.2 (a) Cash inflows: (1) savings in labor, $45,000 per year, (2) […]

Mutually Exclusive Alternatives 5.38 (a) Option A n Net Cash Flow Cumulative CF 0 –$5,000 –$5,000 1 $2,000 –$3,000 2 $2,000 –$1,000 3 $2,000 – $1,000 $0 4 $2,000 $2,000 Option B n Net Cash Flow Cumulative CF 0 –$3,500 […]

6.39 (a) B $4, 211.59 AE(12%) $40,000( / ,12%, 4) $17,350 $4,180.62 AP = =−+ = (b) Process A: $4, 211.29 / 3, 000 $1.40= /hour Process B: $4,180.62 / 3,000 $1.39= /hour (c) Process A is a better choice. […]

1 | Page Chapter 6 Annual Equivalence Method Identifying Cash Inflows and Outflows 6.1 PW(10%) $300 $100( / ,10%,1) $160( / ,10%, 2) $130( / ,10%,6) $105.54 AE(10%) $105.44( / ,10%,6) $24.23 PF PF PF AP =−+ − ++ = […]

16 | Page 7.38 Option 1: Buy a certificate. Option 2: Purchase a bond, and assume that MARR 5%= . Net Cash Flow n Option 1 Option 2 Option 1 – Option 2 0 -$10,000 -$10,000 $0 -650 -650 -650 […]

1 | Page Chapter 7 Rate-of-Return Analysis Concept of Rate of Return Note: Symbol convention—The symbol i* represents the break–even interest rate that makes the PW of the project equal to zero.. The symbol IRR represents the internal rate of […]

Chapter 8 Cost Concepts Relevant to Decision Making Classifying Cost 8.1 • Storage and material handling costs for raw materials: product cost (indirect costs) • Gains or loss on disposal of factory equipment: period costs • Lubricants for machinery and […]

(b) Tax depreciation amount for 2016: 9.37 Given: Cost basis = $85,000 + $4,500 = $89,500 (a) Book depreciation schedule (Depreciation basis = $89,000) 2014 $10,688 $68,125 $21,375 2015 $10,688 $57,438 $32,063 2016 $10,688 $46,750 $42,750 (b) Tax depreciation schedule […]

Chapter 9: Depreciation and Corporate Taxes Economic Depreciation Note: Use current tax rates for corporate taxes. 9.1 The loss of value is defined as the purchase price of an asset less its market Cost Basis 9.3 •Total property value with […]