14. a. Net investment: $80,000
Year Revenues Operating Costs Depreciation Tax OEAT NCF
1 $100,000 $50,000 $11,432 $15,427 $23,141
$34,573 2 107,000 54,000 19,592 13,363 20,045
39,637 3 114,490 58,320 13,992 16,871 25,307
39,299 4 122,504 62,986 9,992 19,810 29,716
50,338
c. NPV = -$80,000 + $34,573(.833) + $39,637(.694)
Yes, build the plant because NPV > 0.
d. Payback calculation:
NINV of $80,000.
e. The project has one internal rate of return because its cash
<ows have one sign change.
15. a. NPVA = -$30,000 + $10,000(3.433) = $4,330
b. IRRA: $30,000 = $10,000(PVIFAr,5)
c. PIA = $34,330/$30,000 = 1.14
d. PBA = 3 years
16. $3,300,000,000 = $651,000,000(PVIFA0.19,n)
17. NINV = $31,400
Basis for MACRS depreciation: $32,000
NCF1 = (0 – (-$9,000) – $4,572.8)(1 – .40) + $4,572.8 = $7,229.12
NCF2 = (0 – (-$9,000) – $7,836.8)(1 – .40) + $7,836.8 = $8,534.72
NPV = -$31,400+ $7,229.12(0.893) + $8,534.72(0.797)
The NPV is higher with accelerated (MACRS) depreciation
than with straight-line depreciation.
18. a. NPV = -$1,200,000 + $168,000(PVIFA0.12,10)
c. The project has one internal rate of return because its cash
<ows have only one sign change.
d. Internal rate of return calculation:
19. a. NPV = -$400,000 + $196,000(0.847) + $214,600(0.718)
b. Yes, the store has a positive net present value.
20. a. Net investment:
Installed cost $15,000,000
Plus: Net working capital
b. Basis for MACRS depreciation = $15,000,000
Year Revenues Operating Costs Depreciation OEAT NCF
1 $2,000,000 $-800,000 $2,143,500$393,900 $2,537,400
2 2,000,000 -800,000 3,673,500-524,100 3,149,400
2,180,000*
*Year 10 NCF includes impact of incremental net working capital change of –
$500,000.
c. NPV = $-13,300,000 + $2,537,400 (0.870) + $3,149,400(0.756)
21. a. IRRAlpha: $10,000 = $20,000 [1/(1 + r)1]
IRRBeta: $20,000 = $35,000 [1/(1 + r)1
NPVAlpha = – $10,000 + $20,000 (PVIF0.10,1)
NPVBeta = – $20,000 + $35,000 (PVIF0.10,1)
b. The company should accept project Beta because its NPV is
22. PVNCFf = SF5.0(4.833) = SF24.17 million
23.
Project evaluation is based on cash <ows, not accounting earnings.
Lack of proFtability could be based on assets in place, not incremental
Risky projects that were not successful;
SOLUTION TO INTEGRATIVE CASE PROBLEM:
CAPITAL BUDGETING
Net investment calculation:
Cost of equipment $1,000,000
Plus: Delivery and
Net cash Bow calculation:
Calculation of year 1 revenues:
Additional Working
Year Revenues Operating Costs* Depreciation Taxes Capital NCF
1 $240,800 $-100,000 157,190 $62,427 $25,000 $253,373
2 228,760 -93,700 269,390 18,044 –
304,416 3 217,322 -86,959 192,390 38,043
– 266,238 4 206,456 -79,746 137,390
* Operating costs reflect the $190,000 saving plus the annual operating costs (including costs
related to off-system sales) on the new system.
**Year 10 net cash flow includes recovery of $75,000 of net working capital and $66,000
recovery of after-tax salvage value.
NPV = $-1,150,000 + $253,373 (0.870) + $304,416(0.756)
Therefore the project is acceptable