978-0133058789 Chapter 11 Part 2

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11-50 (30-40 min.) Answers are in Mexican pesos.

1. After-tax cash operating savings,

.6 × 150,000 = 90,000

PV of cash operating savings, 90,000 × 3.1272 281,448

2. See Exhibit 11-50 on the following page for requirement 2.

3. The analysis in Requirement 2 is correct. The cash flows and the required rate of

1. Annual Operating Cash Flows

Xerox Brother Difference

Salaries $74,880(a) $58,240(b) $16,640

Overtime 3,888(c) — 3,888

2. 18% Total Sketch of Relevant Cash Flows

PV Present

Factor Value 0 1 2 3 4 5

Cash operating savings:* .8475 83,903 99,000

.7182 78,212 108,900

*Amounts are computed by multiplying (150,000 × .6) = 90,000 by 1.10, 1.10 2, 1.10 3, etc.

PV Present value

of $1.00 Present value of

Discounted Cash Flows Annual Cash Flows

at 14% 0 1 2 … 9 10

2. The Xerox machines should be replaced by the Brother equipment.

3. a. How flexible is the new machinery? Will it be useful only for the presently

11–52 (40 min.)

At 14% for 8 Years

Total project Analysis PV Present Sketch of Cash Flows (in thousands)

Replace (A) Factor Value 1 2 3 4 5 6 7 8

Recurring cash

cash outflows $ 38,391

* Half of the salary of the replaced laborer.

Keep (B)

Recurring cash

maintenance cost 4.6389 $ (6,958) (1.5) (1.5) (1.5) (1.5) (1.5) (1.5) (1.5) (1.5)

Overhaul at end of 2nd yr.

maintenance savings 4.6389 $ 2,783 .6 .6 .6 .6 .6 .6 .6 .6

Disposal value of

old machine 1.0000 5,500

Initial investment 1.0000 (45,000)

Overhaul, end of 3rd yr. 0.6750 (3,713) (5.5)

11-53 (30 min.)

The initial purchase cost of the golf course and the operating receipts and

disbursements for the first season of ownership are irrelevant to the present decision. The

relevant annual costs which Ms. Driver should take into consideration are:

Electricity, (300 × 1 KW) × (130 × 5 hrs.) × $.08 per KWH $15,600

11-54 (20-25 min.)

Total

PV Present Sketch of Cash Flows ( in thousands)

Factor Value 0 1 2 3 4 5

Old machine:

11-55 (30-35 min.) This is one of our favorite problems. The heart of the solution extends

through the first paragraph of the response to requirement 2. The remainder is amplification.

Analysis of Cash Flows

Present Proposed Difference

1. Present value of $12,000 per year for

10 years at 10% = $12,000 × 6.000 $72,000

Required investment 54,000

Net present value $18,000

2. The minimum amount of annual revenue that MTA would have to receive to justify

the investment would be that amount yielding an incremental net present value of zero.

As the initial investment is constant, any change in the incremental net present value is

due solely to a change in the amount of revenue. Therefore, the maximum drop in the

477

0 = 6.000[(X – 13,000) – (-10,000)] – 54,000

0 = 6.000(X – 13,000 + 10,000) – 54,000

0 = 6.000(X – 3,000) – 54,000

0 = 6.000X – 18,000 – 54,000

6.000X = 72,000

X = 12,000

Part 2 demonstrates sensitivity analysis, where the manager may see the potential

impact of the possible errors in the forecasts of revenue. Such analysis shows how much of a

margin of safety is available. In this case, his “best guess” is revenue of $15,000 (part 1).

11-56 (30-40 min.)

1.

Discount Present

Factor Value of Sketch of Cash Flows (thousands)

at 18% Cash Flows 0 1 2 3 4

2. The PV of back-haul revenue must fall by $10,815 before the net present value equals

zero. Therefore, the total present value of back-haul revenue would need to be

$340,298 less $10,815, or $329,483.

3. The greatest difficulty is the reliability of the numbers in a world of uncertainty.

Although “the numbers” indicate the truck is a favorable alternative, the following

other factors could influence the final decision:

(a) If the back-haul agreement can be canceled by Retro at any time, the truck

479

(d) Will the truck give the company better service than common carriers?

(e) How certain are the predicted cash flows? Are shipment figures and operating

cost predictions considered to be relatively accurate?

11-57 (15 min.)

1. Straight-line depreciation:

2. MACRS depreciation:

Year Tax Savings PV factor Present Value

1 .2000 × $50,000 × .4 = $4,000 .8929 $ 3,572

4. Mr. Hiramatsu would prefer immediate write-off. Note that the total tax savings is

11-58 (30 min.)

1. See Exhibit 11-58 on the following page. There is a net disadvantage in purchasing

because the net present value is slightly negative. However, such a slight quantitative

disadvantage could be more than offset by positive factors not quantified here.

Exhibit 11-58

Present Value

Less: 30% income tax

on disposal gain (1,800)

Net cash inflow $ 4,200 .6407 2,691

Initial required investment (46,000)

Net present value of all cash flows $ (1,468)

11-59 (30 min.)

Investment $(35,000)

Cash operating savings

Annual savings $6,000

Income taxes @ 44% 2,640

Residual value:

Cash received $ 8,500

Book value 0

Gain $ 8,500

Income tax @ 44% 3,740

483

3 .1481 × 35,000 × .44 = 2,281 .7938 1,810

4 .0741 × 35,000 × .44 = 1,141 .7350 839

Total present value of tax savings $13,270

11-60 (45-60 min.)

A. Investment: $332,500 + (20 × $15,000) = $632,500

B. PV of cash inflows from operations:

Monthly rental payments = ($380 × 12) + ($440 × 8) = $8,080

Repair and maintenance = .15 × $8,080 = $1,212

484

C. PV of income tax savings 53,704

D. PV of cash effect of disposal:

PV of net cash received 293,192

Net present value $ 28,373

The net present value is positive, so the NPV model indicates that Hersch should purchase the apartment complex.

485

11-61 (15-20 min.) Amounts are in thousands of Japanese yen.

1. Depreciation expense: (¥400,000 – ¥50,000) ÷ 10 = ¥35,000

2. Net income:

Revenues ¥330,000

4. Payback period: ¥400,000 ÷ ¥87,000 = 4.6 years

5. Accounting rate of return: ¥52,000 ÷ ¥400,000 = 13%

6. NPV: Annual cash flows, ¥87,000 × 5.2161 ¥453,801

Salvage value, ¥50,000 × 0.2697 13,485

486

Net present value ¥ 67,286

11-62 (50-60 min.)

1.

Table of Cash Flows:

Net Deprec-

End Operating Operating After-Tax iation Net