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Alternative Y
. Select alternative X
(b) Spreadsheet: Select X with the larger PW value. Note handling of $2000 salvage for Y
in year 4
Year
P and S
GI - OE
D
TI
Taxes
CFAT
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Method H: Years 1-5: CFBT = 45,000 – 6,000 = $39,000
SL D = 130,000/5 = $26,000
Taxes = (39,000 – 26,000)(0.34) = $4420
CFAT = 39,000 – 4420 = $34,580
AWH = -150,000(A/P,7%,5) + 34,580 + 20,000(A/F,7%,5)
= $1474
Method H is selected; the same as with MACRS.
17.53 (a) Function for PWA: = -PV(14%,10,-3000,3000) – 15000 displays PWA = $-29,839
(b) All AOC estimates generate tax savings; GI estimates are equal.
Machine A
Machine B
(c) Again, select machine B. All methods give the same conclusion
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By hand, if needed:
Machine A
Year P or S AOC Depr. Tax savings CFAT
0 $-15,000 - - - $-15,000
1 $3000 $3000 $3000 0
2 3000 4800 3900 900
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Machine B
Year 10 has a DR tax of 5,000(0.5) = $2,500
Year P or S AOC Depr Tax savings CFAT
0 $–22,000 - - - $–22,000
1 $1500 $4400 $2950 1450
2 1500 7040 4270 2770
3 1500 4224 2862 1362
After-Tax Replacement
17.54 (a) For a capital loss, it is the difference between sales price and the asset’s book value.
(b) The AW of the challenger is affected in year 0 by the capital gains tax. If it is a capital
17.56 (a) Defender: CL = BV2 - sales price = [300,000 – 2(60,000)] - 100,000
This represents a tax savings for the challenger in year 0.
(b) Defender, years 1-3: TI = -120,000 – 60,000 = $-180,000
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Taxes = 180,000(0.35) = $-63,000
CFAT = -120,000 - (-63,000) = $-57,000
Challenger, years 1-3: TI = -30,000 -140,000 = $-170,000
Taxes = -170,000(0.35) = $-59,500
CFAT = -30,000 - (-59,500) = $29,500
(c) AWD = -100,000(A/P,15%,3) – 57,000
Conclusion: Keep the defender
(d) Spreadsheet shows CFAT and AW values; keep the defender.
17.57 Find after-tax PW of costs over 4-year study period. DR is involved on the defender trade.
By hand:
Defender:
= -7000 – (-4200)
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= $-2800
PWD = -35,000 + 5000(P/F,12%,4) – 2800(P/A,12%,4)
= -35,000 + 5000(0.6355) – 2800(3.0373)
= $-40,327
Challenger:
Conclusion: Select the challenger with a lower PW of cost
Spreadsheet: Same decision; select the challenger
Year
OE
P and S
Rate
Depr.
TI
Taxes
CFAT
4
-8000
0
0.0741
1,778
-9,778
-3,422
-4,578
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17.58 Challenger: Determine AWC and compare it with AWD = $2100.
Defender has DR on trade since BV = 0 now.
CFAT, years 1-10 = CFBT – (CFBT - D)( Te )
AWC = -82,500(A/P,8%,10) +15,000(A/F,8%,10) + 12,300
Retain the defender; it has a larger AW value.
17.59 Defender
Original life estimate was 12 years.
Challenger
CL from sale of D = BV7 – Market value
Tax savings from CL, year 0 = 137,500(0.32)
Challenger DR when sold in year 8 = $0
Select the defender. Decision was incorrect since D has a lower AW value of costs.
17.60 (a) By hand: Lives are set at 5 (remaining) for the defender and 8 years for the challenger.
Defender
Challenger
DR from sale of D = Market value – BV5
Challenger annual depreciation = 15,000 – 3000 = $1500
8
AWC = –15,000(A/P,6%,8) + 3000(A/F,6%,8) – 1500 + 180
Select the challenger
(b) Spreadsheet: With n = 5, AWD = $-4178; with n = 8, AWC = $-3432.
Select the challenger
(c) AWD = –15,000(A/P,12%,5) + 2000(A/F,12%,5) – 1200
Select the challenger. The before-tax and after-tax decisions are the same.
17.61 (a) Study period is set at 5 years. The only option is the defender for 5 years and the
Defender
Upgrade SL depreciation = $3000 year (years 1-3 only)
Actual cost, years 4-5: = 6000 – 2400 = $3600
AWD = -24,000(A/P,12%,5) - 2400 - 1200(F/A,12%,2)(A/F,12%,5)
Challenger
DR on defender = $15,000
Retain the defender since the AW of cost is smaller.
(b) AWC will become less costly, but the revenue from the challenger’s sale between
$2000 to $4000 will be reduced by the 40% tax on DR in year 5.
Economic Value Added
17.62 (a) The EVA shows the monetary worth added to a corporation by an alternative.
17.63 BV1 = 300,000 – 300,000(0.20) = $240,000
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EVA = NOPAT – MARR(BV1)
= 70,000 – (0.15)(240,000)
= $34,000
17.64 Find BVt-1 and solve for NOPAT and TI, year 2, and solve for OE
Year 2 results:
EVA = 28,000 = NOPAT – (0.14)(366,685)
17.65 The spreadsheet verifies that the AW values are the same. Note the difference in
terms turn positive, indicating a positive contribution to the corporation’s worth.
17.66 Depreciation is SL: Hong Kong: 4.2 million/8 = $525,000
17.67 (a) Column L shows the EVA each year. Use Eq. [17.23} to calculate EVA.
(c) Use Goal Seek to change cell A1 from 12% to 8.51% per year
Value-Added Tax
17.68 A sales tax is collected when the goods or services are bought by the end-user, while
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(b) Tax sent by vendor B = amount collected – amount paid to vendor A
= 32,500 – 60,000(0.25) = $17,500
(c) Amount collected by Treasury = 250,000(0.25) = $62,500
17.70 VAT by supplier C = 620,000(0.125) = $77,500
17.74 Taxes sent = amount collected – amount paid
17.75 VAT collected = sent by suppliers + sent by Ajinkya
ADDITIONAL PROBLEMS AND FE EXAM PRACTICE PROBLEMS
17.76 Before-tax ROR = After-tax ROR/(1- Te)
17.77 Te = 0.07 + (1 – 0.07)(0.36) = 0.4048 (40.5%)
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17.81 Answer is (a)
17.82 Answer is (d)
17.83 Tax difference = (160,000,000 – 120,000,000)(0.50) = $20,000,000
17.85 The sale results in DR = $16,000, which is an increase in TI.
17.87 CFAT = GI – OE – TI(Te)
26,000 = 30,000 – TI(0.40)
17.88 BV5 = 100,000(0.0576) = $5760
Solution to Case Study, Chapter 17
There is not always a definitive answer to case study exercises. Here are example responses.
AFTER-TAX ANALYSIS FOR BUSINESS EXPANSION
1. The next two spreadsheets perform an analysis of the four D-E mix scenarios
Note: Column B, E used instead of OE for operating expenses.
2. Subtract 2 different equity CFAT totals.
3. This happens because as less of Pro-Fence’s own (equity) funds are committed to the Victoria
4. Use the EVA series as an estimate of contribution to Pro-Fence’s bottom line through time.
Equations used to determine the EVA use NOPAT (or NPAT) and interest on invested capital.
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(Interest on invested capital)t = i(BV in the previous year)
= 0.10(BVt–1)
Note: BV on the entire $1.5 million in depreciable assets is used to determine the interest on
