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Chapter 10 CFIN5
Chapter 10 Solutions
10-1 a. 1 3
Operating income before depreciation $25,000 $25,000
Depreciation* (19 ,800) ( 9 ,000)
b. 1 3
After-tax NOI $ 3,120 $ 9,600
ADD: depreciation (non-cash expense) 19 ,800 9 ,000
10-2 a & b
1 2 3 4
Sales $92,000 $92,000 $92,000 $92,000
Operating costs (0,75 x Sales) (69,000) (69,000) (69,000) (69,000)
Chapter 10 CFIN5
10-3 Purchase price $(350,000)
Shipping cost ( 20,000)
Installation cost ( 50 ,000)
Depreciable basis $420,000
Year Depreciation: MACRS 3 -year class
1 $138,600 = $420,000 x 0.33
10-4 Purchase price $(500,000)
Shipping & installation costs ( 75 ,000)
Depreciable basis $575,000
Year Depreciation: MACRS 3 -year class
1 $115,000 = $575,000 x 0.20
10-5 a. Purchase price $(214,000)
Installation ( 26 ,000)
Depreciable basis $(240,000)
Year Depreciation: MACRS 3 -year class
1 $48,000 = $240,000 x 0.20
b. Selling price at the end of four years = $80,000
Book value at the end of four years = $240,000 - $48,000 - $76,800 - $45,600 - $28,800
= $40,800
10-6 Because the depreciation expense is the same each year, the supplemental operating cash flow will be the
same for every year.
Chapter 10 CFIN5
10-7 Depreciable basis = $120,000
1 2 3 4
Percent depreciated 0.33 0.45 0.15 0.07
1234
Savings $30,000 $30,000 $30,000 $30,000
10-8 a. Old Lathe New Lathe Difference
NOI, excluding depreciation $90,000 $90,000 $ 0
b. Old Lathe New Lathe Difference
Net income $30,000 $33,000 $3,000
Depreciation 40 ,000 35 ,000 (5 ,000)
Alternative solution:
NOI, excluding depreciation $90,000 $90,000 $ 0
10-9 Selling price = $102,000
Book value = $90,000
10-10 Selling price = $4,000
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Chapter 10 CFIN5
10-11 Initial investment outlay:
Purchase price $(432,000)
Installation ( 52,000)
Increase in net working capital ( 22 ,000)
Supplemental operating cash flows:
123
Savings $185,000 $185,000 $185,000
Depreciation (159 ,720) (217 ,800) ( 72 ,600)
Taxes (0.40) ( 10 ,112) 13 ,120 ( 44 ,960)
ADD: Depreciation 159 ,720 217 ,800 72 ,600
Depreciation % 0.33 0.45 0.15
Depreciation = $484,000 x Deprec % $159,720 $217,800 $72,600
Alternative solution:
1 2 3
Terminal cash flow:
Selling price = $220,000
Cash flow timeline:
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
0123
r =
14%
10-12 Initial investment outlay = Purchase price = $90,000
Supplemental operating cash flows:
12345
Increase in operating income $29,800 $29,800 $29,800 $29,800 $29,800
Depreciation (29 ,700) (40 ,500) (13 ,500) ( 6 ,300) 0
Taxes (0.34) ( 34 ) 3 ,638 ( 5 ,542) ( 7 ,990) (10 ,132)
ADD: Depreciation 29 ,700 40 ,500 13 ,500 6 ,300 0
Alternative solution:
Taxes ( 34 ) 3 ,638 ( 5 ,542) ( 7 ,990) (10 ,132)
Depreciable basis $90,000
Depreciation rates 0.33 0.45 0.15 0.07 0.00
Terminal cash flow:
Salvage value $8,000
Tax on sale (2 ,720)
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Chapter 10 CFIN5
Financial calculator solution:
CF0 = -90,000
CF1 = 29,766
10-13 Initial investment outlay:
Supplemental operating cash flows:
123
operating income $14,300 $14,300 $14,300
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Cash Flow Timeline:
012345
5,280
24,948
r =
15%
25,883.48
25,283.93
15,950.03
12,469.94
12,403.57
1,990.95 = NPV
Chapter 10 CFIN5
after-tax operating income 2,535 (165) 6,585
ADD: depreciation 10 ,075 14 ,575 3 ,325
Alternative solution:
Increase in operating income $14,300 $14,300 $14,300
Taxes ( 1 ,690) 110 ( 4 ,390)
New machine depreciable basis: $37,500
MACRS rates for new machine: 0.33 0.45 0.15
*Depreciation—new machine $12,375 $16,875 $5,625
Depreciation—old machine 2,300 2,300 2,300
Terminal cash flow:
Salvage value of new machine $6,000
Tax on sale of new machine (1,350)
Book value of new machine after three years:
Book value of old machine after three years:
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Cash Flow Timeline:
IRR = 13.25%
0123
r =
11%
Chapter 10 CFIN5
Financial calculator solution:
CF0 = -31,180
CF1 = 12,610
CF2 = 14,410
CF3 = 12.800
I = 11
10-14 Initial investment outlay:
Purchase price $(153,800)
Salvage value of old machine 10,860
Tax on sale of old machine ( 1,144)
Supplemental Operating Cash Flows:
1 23456
operating income $40,000.0 $40,000.0 $40,000.0 $40,000.0 $40,000.0 $40,000.0
depreciation (22 ,760.0) (49 ,216.0) (29 ,222.0) (18 ,456.0) (16 ,918.0) ( 9 ,228.0)
Taxes (0.40) ( 6 ,896.0) 3 ,686.4 ( 4 ,311.2) ( 8 ,617.6) ( 9 ,232.8) (12 ,308.8)
ADD: depreciation 22 ,760.0 49 ,216.0 29 ,222.0 18 ,456.0 16 ,918.0 9 ,228.0
Alternative solution:
Increase in operating income 40,000.0 40,000.0 40,000.0 40,000.0 40,000.0 40,000.0
Taxes ( 6 ,896.0) 3 ,686.4 ( 4 ,311.2) ( 8 ,617.6) ( 9 ,232.8) (12 ,308.8)
Depreciable basis—new machine: $153,800
MACRS rates 0.20 0.32 0.19 0.12 0.11 0.06
Depreciation--new $30,760 $49,216 $29,222 $18,456 $16,918 $9,228
Depreciation--old 8 ,000 0 0 0 0 0
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Chapter 10 CFIN5
Terminal Cash Flow:
Salvage value of new machine $25,000
Tax on sale of new machine (10,000)
Salvage value of old machine 0
Return net working capital to original level (18 ,000)
Financial calculator solution:
CF0 = -126,084.0
CF1 = 33,104.0
CF2 = 43,686.4
CF3 = 35,688.8
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
Cash Flow Timeline:
0123456
( 3,000.0)
24,691.2
r =
12%
29,557.14
34,826.53
25,402.58
19,944.08
17,458.14
12,509.33
13,613.80 = NPV
Chapter 10 CFIN5
10-15 r = 4% + (11% - 4%)(0.8) = 9.6%
1
7
(1.096)
1
NPV $6,250 $29,500
0.096
$6,250(4.933204) $29,500
$30,832.53 $29,500 $1,332.53
é ù
-
ê ú
= -
ê ú
ê ú
ë û
= -
= - =
IRR = 10.95%
Calculator solution: CF0 = -29,500, CF1 – CF7 = 6,250, I = 9.6; compute NPV = 1,332.53; IRR = 10.95%
Alternative calculator solution using TVM keys: N = 7, PV = -29,500, PMT = 6,250, FV = 0; compute I/Y
= 10.95% = IRR
The new division should be added, because NPV > 0.
10-16 r = 3% + 6%(1.3) = 10.8%
1
3
(1.108)
1
NPV $165,000 $405,000
0.108
$165,000(2.45224) $405,000
$404,619.64 $405,000 $380.36
é ù
-
ê ú
= -
ê ú
ê ú
ë û
= -
= - =-
IRR = 10.75%
Calculator solution: CF0 = -405,000, CF1 – CF3 = 165,000, I = 10.8; compute NPV = -380.36; IRR =
10.75%
Alternative calculator solution using TVM keys: N = 3, PV = -405,000, PMT = 165,000, FV = 0; compute
I/Y = 10.75% = IRR
The project should not be purchased, because NPV < 0.
10-17 NPV Probability NPV x Probability
$31,500 0.20 $6,300
19,800 0.70 13,860
-20,100 0.10 -2 ,010
E(NPV) = $18,150
10-18 NPV Probability NPV x Probability
$185,400 0.25 $46,350
128,300 0.60 76,980
-77,600 0.15 -11 ,640
E(NPV) = $111,690
Chapter 10 CFIN5
The project should not be purchased, because CV > 0.70.
10-19 Project IRR Risk Risk-Adjusted r Acceptable?
P 10.0% Low 9% = 11% - 2% Yes, IRR > r (risk-adjusted)
10-20 Project IRR Risk Risk-Adjusted r Acceptable?
X 14.0% Average 15% = 15% + 0% No, IRR < r
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.
