P11-15. Depreciation
LG 5; Basic
Depreciation Schedule
Year Depreciation Expense
1 $68,000 0.20 $13,600
P11-16. Incremental operating cash inflows
LG 5; Intermediate
a. Incremental profits before depreciation and tax $1,200,000 $480,000
$720,000 each year
b.
Year (1) (2) (3) (4) (5) (6)
PBDT $720,000 $720,000 $720,000 $720,000 $720,000 $720,000
c.
Cash
flow
(1)
$592,000
(2)
$688,000
(3)
$584,000
(4)
$528,000
(5)
$528,000
(6)
$472,000
(NPAT depreciation)
P11-17. Personal finance: Incremental operating cash inflows
LG 5; Challenge
Richard and Linda Thomson
Incremental Operating Cash Flows
Replacement of John Deere Riding Mower
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Savings from new and improved mower $500 $ 500 $500 $500 $500 —
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Chapter 11 Capital Budgeting Cash Flows 226
*MACRS Depreciation Schedule
Year Base MACRS Depreciation
Year 1 $1,800 20.0% $360
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Chapter 11 Capital Budgeting Cash Flows 227
P11-18. Incremental operating cash flows—expense reduction
LG 5; Intermediate
Year (1) (2) (3) (4) (5) (6)
Incremental
expense savings $16,000 $16,000 $16,000 $16,000 $16,000 $ 0
Incremental profits
P11-19. Incremental operating cash flows
LG 5; Intermediate
a.
Year Revenue
Expenses
(excluding
depreciation
and interest)
Profits before
Depreciation
and Taxes
Depre-cia
tion
Net
Profits
before
Taxes Taxes
Net
Profits
after Tax
Operating
Cash
Inflows
New Lathe
1 $40,000 $30,000 $10,000 $2,000 $8,000 $3,200 $4,800 $6,800
b. Calculation of incremental cash flows
Year New Lathe Old Lathe Incremental Cash Flows
1 $6,800 $6,000 $800
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Chapter 11 Capital Budgeting Cash Flows 228
c.
P11-20. Determining incremental operating cash flows
LG 5; Intermediate
Year
1 2 3 4 5 6
Revenues: (000)
New buses $1,850 $1,850 $1,830 $1,825 $1,815 $1,800
Old buses 1,800 1,800 1,790 1,785 1,775 1,750
P11-21. Terminal cash flows—various lives and sale prices
LG 6; Challenge
a.
After-tax proceeds from sale of new asset 3-Year*5-Year*7-Year*
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Chapter 11 Capital Budgeting Cash Flows 229
*1. Book value of asset [1 (0.20 0.32 0.19)] $180,000 $52,200
Proceeds from sale $10,000
2. Book value of asset [1 (0.20 0.32 0.19 0.12 0.12)] $180,000 $9,000
3. Book value of asset $0
b. If the usable life is less than the normal recovery period, the asset has not been depreciated fully and a
tax benefit may be taken on the loss; therefore, the terminal cash flow is higher.
c.
(1) (2)
After-tax proceeds from sale of new asset
1. Book value of the asset $180,000 0.05 $9,000; no taxes are due
2. Tax ($170,000 $9,000) 0.4 $64,400.
d. The higher the sale price, the higher the terminal cash flow.
P11-22. Terminal cash flow—replacement decision
LG 6; Challenge
After-tax proceeds from sale of new asset
1Book value of new machine at end of year 4:
2Book value of old machine at end of year 4:
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Chapter 11 Capital Budgeting Cash Flows 230
P11-23. Relevant cash flows for a marketing campaign
LG 3, 4, 5, 6; Challenge
Marcus Tube
Calculation of Relevant Cash Flow
($000)
Calculation of Net Profits after Taxes and Operating Cash Flow:
with Marketing Campaign
2016 2017 2018 2019 2020
Sales $20,500 $21,000 $21,500 $22,500 $23,500
Less: Less: Operating expenses
General and
administrative
Total operating
expenses 2,700 2,750 2,800 2,900 3,000
Net profit
Net profit
Without Marketing Campaign
Years 2016–2020
Relevant Cash Flow
($000)
Year
With Marketing
Campaign
Without Marketing
Campaign
Incremental
Cash Flow
2016 $1,340 $1,400 $(60)
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Chapter 11 Capital Budgeting Cash Flows 231
P11-24. Relevant cash flows—no terminal value
LG 3, 4, 5; Challenge
a. Installed cost of new asset
* Book value of old machine:
b.
Calculation of Operating Cash Flow
Year (1) (2) (3) (4) (5) (6)
Old Machine
PBDT $14,000 $16,000 $20,000 $18,000 $14,000 $ 0
New Machine
PBDT $30,000 $30,000 $30,000 $30,000 $30,000 $ 0
cash flows $13,600 $16,240 $11,080 $11,040 $13,440 $1,600
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Chapter 11 Capital Budgeting Cash Flows 232
c.
P11-25. Integrative—determining relevant cash flows
LG 3, 4, 5, 6; Challenge
a. Initial investment:
*Book value of old asset:
b.
Calculation of Operating Cash Flows
Year
Profits before
Depreciation
and Taxes Depreciation
Net Profits
before Taxes Taxes
Net Profits
after Taxes
Operating
Cash
flows
New Grinder
1 $43,000 $22,000 $21,000 $8,400 $12,600 $34,600
Existing Grinder
1 $26,000 $11,400 $14,600 $5,840 $8,760 $20,160
Calculation of Incremental Cash Flows
Year New Grinder Existing Grinder Incremental Operating
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Cash Flow
1 $34,600 $20,160 $14,440
c. Terminal cash flow:
After-tax proceeds from sale of new asset
Proceeds from sale of new asset $29,000
Tax on sale of new asset* (9,400)
*Book value of asset at end of year 5 $5,500
d. Year 5 relevant cash flow:
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Chapter 11 Capital Budgeting Cash Flows 234
P11-26. Personal finance: Determining relevant cash flows for a new boat
LG 3, 4, 5, 6; Challenge
Jan and Deana
Cash Flow Budget
Purchase of Boat
a. Initial investment
b. Operating cash flows Year 1 Year 2 Year 3 Year 4
c. Terminal cash flow—end of year 4
d. Summary of cash flows Cash Flow
e. The ownership of the boat is virtually just an annual outflow of money. Across the four years,
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