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P11-27 Integrative: Determining relevant cash flows (LG 3, 4, 5, 6; Challenge)
a.
Initial Investment A B
Installed cost of new asset
Cost of new asset $
40,000 $ 54,000
)(14,512)
Change in working capital 4,000 6,000
*Book value of old asset: [1
(0.20
0.32
0.19)]
($32,000)
$9,280
b. Calculation of Operating Cash Flows
Year
Profits
before
Depreciati
on
and Taxes Depre-
ciation
Net Profits
before
Taxes Taxes
Net Profits
after
Taxes
Operating
Cash
Inflows
Hoist A
1 $21,000 $9,600 $11,400 $4,5
60 $6,840 $16,44
0
2 21,000 15,360 5,640 2,25
63,384 18,744
Hoist B
1 $22,000 $12,00
0$10,000 $4,0
00 $6,000 18,000
2 24,000 19,200 4,800 1,92
02,880 22,080
Existing
Hoist
1 $14,000 $3,840 $10,160 $4,0
64 $6,096 $9,936
2 14,000 3,840 10,160 4,06
46,096 9,936
Calculation of Incremental Cash Flows
Incremental Cash Flow
Year Hoist A Hoist B Existing
Hoist Hoist A Hoist B
1 $16,4
40 $18,0
00 $9,
93
6
$6,50
4$8,064
2 18,74
422,08
09,9
36 8,808 12,144
c. Terminal cash flow: (A) (B)
After-tax proceeds form sale of new asset
P roceeds from sale of new asset $12,000 $20,000
Tax on sale of new assetl (3,840) (6,800)
Total proceeds—new asset 8,160 13,200
1Book value of Hoist A at end of year 5
$2,400
Recapture depreciation = $12,000
$2,400
$9,600. Tax consequences = $9,600
0.40
$3,840
tax.
Year 5 relevant cash flow—Hoist A:
Operating cash flow
d.
P11-28 Integrative: Complete investment decision (LG 1, 2, 3, 4, 5, 6; Challenge)
Note: All values in this problem are expressed in Canadian dollars. The problem indicates Maritime
related revenue received at year-end.
a.
Revenue from sale of gold (34,800 C$1,562.50)
C$54,375,000
Less: Annual operating expenses
C$19,420,000
Add: Depreciation expense (1/5th of C$67.8 annually)
C$13,560,000
Operating cash flow
C$30,453,492
b. Cash Flows:
c. To solve for IRR in Excel, begin by arranging the cash inflows and outflows in adjacent cells in
d. To solve for NPV in Excel, begin by recognizing the net present value of reopening the mine
(NPV) = Present value of operating cash flows from mine – Cost of reopening the mine.
Present value of operating cash flows may be found with the PV command using this syntax:
P11-29 Integrative: Complete investment decision (LG 1, 2, 3, 4, 5, 6; Challenge)
a. Initial investment:
Installed cost of new press
Cost of new press $2,200,000
After-tax proceeds from sale of old asset
Proceeds from sale of existing press (1,200,000)
*Book value
(0.40)
$480,000.
b. Calculation of Operating Cash Flows
Ye
ar Revenues Expenses Depreciatio
n
Net Profits
before Taxes Taxes Net
Profits
after
Taxes
Cash
Flow
1 $1,600,0
00 $800,0
00 $440,00
0$360,000 $144,0
00 $216,0
00 $656,0
00
2 1,600,00
0800,00
0704,000 96,000 38,400 57,600 761,60
0
0
66,00
044,000
c. Payback period 2 years ($62,400 ¸ $647,200) 2.1 years
d. NPV may be found in Excel in two steps:
(i) Find the present value of cash inflows CF1 through CF6 using the NPV command, start by
IRR is the interest rate that makes the following equation hold:
To find IRR in Excel with the IRR command, begin by arranging the cash outflow and inflows
project should be accepted.
P11-30 Integrative: Investment decision (LG 1, 2, 3, 4, 5, 6; Challenge)
a. Initial investment:
Installed cost of new asset
Cost of the new machine $1,200,000
Installation costs 150,000
*Book value
$384,000. So $185,000
$384,000
$199,000 loss from sale of existing press. Tax
consequences are $199,000 loss from sale
(0.40)
$79,600.
Calculation of Operating Cash Flows – New Machine
Ye
ar
Reduction in
Operating Costs Depreciation Net Profits
before Taxes Taxes Net Profits
after Taxes Cash
Flow
1 $350,000 $270,000 $80,000 $32,00
0$48,000 $318,0
00
2 350,000 432,000 82,000 32,80
0
49,200 382,80
0
Existing Machine
Year Depreciati
on
Net Profits
before
Taxes Taxes Net Profits
after
Taxes
Cash
Flow
1 $152,
000
$15
2,000
$60,80
0$91,2
00 $60,800
2 96,00
0
96,
000
38,400 57,6
00 38,400
Incremental Operating Cash Flows
Year New Machine Existing Machine Incremental Cash Flow
1 $318,000 $60,800 $257,200
2 382,800 38,400 344,400
Terminal cash flow:
After-tax proceeds from sale of new asset
Proceeds from sale of new asset $200,000
*Book value of new machine at the end of year 5 is $67,500. So $200,000
$67,500
$132,500 income from
sale of old machine, and 132,500
´
0.40
$53,000 tax liability
CF5 $274,800 172,000 $446,800
In Excel, arrange CF1 through CF5 in adjacent cells in a row or column and use NPV command
to find present value of those cash flows. If, for example, the cash flows appear in cells A2:A6,
c.
To use the IRR command in Excel, arrange all cash flows (including initial outlay) in adjacent
cells in a row or column beginning with the outflow. If, for example, the cash outflow is
lowest acceptable IRR.
