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Chapter 12 - Strategy and the Analysis of Capital Investments
12-44 (Continued-1)
PV factor Year CF PV CF
Net investment outlay 1.000 0 ($480,000)
($480,000
)
After-tax cash inflow 0.909 1 $208,000 $189,072
After-tax cash inflow 0.826 2 $208,000 $171,808
After-tax cash inflow 0.751 3 $208,000 $156,208
3. The weighted-average cost of capital (WACC) that would make the company
indifferent between keeping or replacing asset A is 14.3597%, as follows:
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Chapter 12 - Strategy and the Analysis of Capital Investments
12-44 (Continued-2)
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Education.
Chapter 12 - Strategy and the Analysis of Capital Investments
45 Machine Replacement with Tax Considerations; Spreadsheet (50 minutes)
(Note: the amounts given below are slightly different from the results obtained using the
present value factors provided in Appendix C, Tables 1 and 2. This is due to the rounding, to
three digits, in the present value factors presented in Tables 1 and 2 in the text. The solution
below is based on the use of PV and NPV functions in Excel.)
(NOTE: The present value factors listed above are taken from text Tables 1 and 2 and,
as such, have been rounded to three decimal places. However, the actual calculations
above are done using the NPV and PV built-in functions in Excel, and as such are not
rounded.)
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Education.
Chapter 12 - Strategy and the Analysis of Capital Investments
12-45 (Continued)
The total cost of the new machine, including the purchase cost and the cash
operating cost in each of the three years is, in PV terms, $202,440 below the
total cost of continuing with the original equipment. Therefore, from a purely
financial standpoint, the purchase of the new machine is a good investment.
Depreciation Calculations for Replacement Machine: Using VDB Function in
Excel
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Chapter 12 - Strategy and the Analysis of Capital Investments
12-46 Equipment Replacement; MACRS (50 minutes)
1. Per-unit pre-tax cash flow per unit, additional unit sales:
Sales price per unit $3,500
Current variable (cash) manufacturing cost per unit − 2,450
Current cash contribution margin per unit $1,050
Cash-based cost savings per unit with the new machine + 150
Pre-tax cash flow per unit for the additional units $1,200
After-Tax Cash Flow Analysis Present Discount
Item Description Value Factor 1
2016 2017 2018 2019
Purchase cost of the new asset ($608,000)
Capitalized installation cost of the new asset ($12,000)
After-tax proceeds from disposing old ($50,000 × (1 − t)) $30,000
Pre-tax cash flow per unit, sale of additional units (above) $1,200 $1,200 $1,200 $1,200
Additional units (given) 30 50 50 70
Pre-tax cash flow from additional units $ 36,000 $ 60,000 $ 60,000 $ 84,000
VacuTech can expect to have a negative NPV of $60,006 if it purchases the new pump.
1Note: The above PV of after-tax cash inflows ($529,994) was determined using the NPV built-in function in Excel. If,
instead, the present value factors from Appendix C, Table 1 were used, the indicated NPV would be ($59,840).
The PVs for after-tax cash flows are as follows: Year 1 = $155,243; Year 2 = $168,286; Year 3 = $97,516; Year 4 =
$109,115.
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12-46 (Continued)
2. Other factors the firm needs to consider include:
Maintenance costs of the machines
Reliability of the machines
Changes and timing of newer machine
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Education.
Chapter 12 - Strategy and The Analysis of Capital Investments
PROBLEMS
12-47 Basic Capital-Budgeting Techniques; No Taxes; Uniform Net Cash Inflows;
Spreadsheets (45-60 minutes)
1. Unadjusted Payback Period: As shown above, the payback period occurs
between years 4 and 5. If we assume that the cash inflows occur evenly
2. Accounting (book) rate of return (ARR):
From the above, the average increase in operating income over the 10-year
period = $850,000 ÷ 10 years = $85,000 ÷ year. Thus, the ARR
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Education.
Chapter 12 - Strategy and the Analysis of Capital Investments
12-47 (Continued-1)
3. NPV: using the PV factors from Appendix C, Table 2, NPV =$197,500
As shown above, based on the NPV function of Excel, NPV = $197,533 (the
4. Present value payback period: as indicated in the above schedule (with PV
factors rounded to three decimal places, per Table 2), the present value
payback period is “6-plus” years; this is the time it takes for the present value
5. Internal rate of return: as indicated in the above schedule, we can use the built-
in function in Excel to estimate the IRR for this proposed investment; IRR =
19.04%.
Alternatively, we can estimate the IRR as follows. We are looking for an
interest/discount rate that provides for a NPV = $0 (i.e., a rate that provides a
present value of future cash inflows equal in amount to the original investment
IRR =
20% +
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Chapter 12 - Strategy and the Analysis of Capital Investments
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Education.
Chapter 12 - Strategy and the Analysis of Capital Investments
12-47 (Continued-2)
6. Modified internal rate of return (MIRR):
