• PW of tax credit (shield) on depreciation and interest:
n Dn In
Sum Combined tax
savings
1 $66,660 $20,000 $86,660 $34,664
• PW of net proceeds from sale:
Total depreciation amount= $200,000
Book value= $0
10.33
(a) Determine the annual cash flows for each option.
• Buy option:
o Net proceeds:
$15, 400
Total amount of depreciation = $17,248
S=
n
1
2
3
Interest
payment
$2,002.75
$1,263.49
$460.58
o Annual depreciation:
1
$28,000 0.20 $5,600
D
= ×=
Cash flow elements
End of period
0
1
2
3
Investment
($28,000)
Net proceeds
$14,099
Net cash flow
• Lease option:
Cash flow elements
End of period
0
1
2
3
Security deposit
($500)
Refund
Net cash flow
($500)
(b)
PW(13%) $10, 462
buy
= −
and placed at the end of each year.
Principal
$8,572.85
$9,312.11
Total
10.34
(a) Boggs’ PW cost of leasing:
(b) Boggs’ PW cost of owning:
• PW of after–tax maintenance expenses:
1$5,000(1 0.40)( / ,15%,3)
$6,850
P PA= −
=
• PW of net proceeds from sale:
total depreciation amount = $61,600
book value = $38,400
10.35
(a) Purchase with debt:
• PW of after–tax revenue:
1
$10,000(1 0.30)( / ,10%,5) $26,536P P A= − =
• PW of after–tax expenses:
• PW of tax credit (shield) on depreciation and interest:
Combined Tax Savings
1 $3,571 $3,000 $6,571(0.30) $1,971
n n
n D I
=
4$1,971( / ,10%,1) $2,595( / ,10%, 2) $6,647P P F P F= + + =
• PW of net proceeds from sale:
purchase 1 2 3 4 5
PW(10%) $3, 680PPPPP=++++=
(b) Financial lease:
(c) The financial lease is a better choice.
10.36 Setting the lease payment schedule: Let X denote the annual lease receipt
from tractor lease. We will assume that these lease payments are received at
year end.
Cash Flow End of Period
Elements 0 1 2 3
Investment -$53,000
total depreciation amount = $32,648
book value = $53,000 – $32,648 = $20,352
10.37
• Debt Financing:
0
1
2
Investment
-$100,000
$48,000
-$6,000
-$6,000
+Depreciation(0.40)
$8,000
Loan Repayment
$100,000
• Lease Financing:
0
1
2
0.40)
–Lease payment (1–
-$25,200
-$25,200
0
Short Case Studies
ST 10.1
(a)
We need to examine two situations: (1) If the firm decided not to pursue the project, then $6,000,000 can be written off as an
expense in 2015, which is (0.38)($6,000,000) = $2,280,000 worth of tax savings. Therefore, if the firm decided to go with the
project, it incurs an opportunity cost of $2,280,000. This should be factored into the analysis.
(b)
Depreciation schedules:
(c)
Taxable gains:
• Land: $1,500,000 – $2,500,000 = -$1,000,000
(e)
2015 2016 2017 2018 2019 2020 2021 2022 2023
Income Statement
Unit Sales 22,000 22,000 22,000 22,000 22,000 22,000
Sales Price 8,200 8,610 9,041 9,493 9,967 10,466
Sales Revenue 180,400,000 189,420,000 198,891,000 208,835,550 219,277,328 230,241,194
Expenses:
Net Income 32,896,595 34,044,329 36,246,011 38,426,647 40,622,013 42,975,939
Cash Flow Statement
Operating Activities:
Net Income 32,896,595 34,044,329 36,246,011 38,426,647 40,622,013 42,975,939
Add Noncash Expenses:
Am ortization 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Depreciation (B+E) 1,580,976 2,511,792 1,881,792 1,431,792 1,111,392 696,276
ST 10.2 (a), (b) (All units are in thousand dollars)
0 12345-7 8 9 10-11 12
Income Statement
Revenue 51,000$ 51,000$ 51,000$ 51,000$ 85,000$ 136,000$ 136,000$ 136,000$ 136,000$
Expenses:
Production costs 36,000$ 36,000$ 36,000$ 36,000$ 60,000$ 96,000$ 96,000$ 96,000$ 96,000$
Depreciation :
Building 1,106$ 1,154$ 1,154$ 1,154$ 1,154$ 1,154$ 1,154$ 1,154$ 1,106$
Machines 14,290$ 24,490$ 17,490$ 12,490$ 8,930$ 4,460$
ST 10.3 Morgantown Mining Company
(a) Unit-production method
(Units are thousand dollars)
0
1
2
3
4
5
6
7
8
9
10
Income Statement
Revenues (savings)
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
Expenses:
O&M
$2,400
$2,400
$2,400
$2,400
$2,400
$2,400
$2,400
$2,400
$2,400
$2,400
Investment Activities:
Investment
($19,300)
Salvage
$500
Gains Tax
$2,500
Net Cash Flow
$5,012
$5,012
$5,012
$5,012
$5,012
$5,012
$5,012
$5,012
$5,012
$8,012
(b) 7 year MACRS
$1,880
$1,880
$1,880
$1,880
$1,880
$1,880
$1,880
$1,880
$1,880
$1,880
Taxable Income
$5,220
$5,220
$5,220
$5,220
$5,220
$5,220
$5,220
$5,220
$5,220
$5,220
Income Taxes(40%)
$2,088
$2,088
$2,088
$2,088
$2,088
$2,088
$2,088
$2,088
$2,088
$2,088
Net Income
Net Income
$3,132
$3,132
$3,132
$3,132
$3,132
$3,132
$3,132
$3,132
$3,132
$3,132
Depreciation
$1,880
$1,880
$1,880
$1,880
$1,880
$1,880
$1,880
$1,880
$1,880
$1,880
(Units are thousand dollars)
0
1
2
3
4
5
6
7
8
9
10
Income Statement
Revenues (savings)
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
Expenses:
O&M
$2,400
$2,400
$2,400
$2,400
$2,400
$2,400
$2,400
$2,400
$2,400
$2,400
Cash Flow Statement
Operating Activities:
Net Income
$2,605
$1,424
$2,235
$2,814
$3,226
$3,227
$3,226
$3,744
$4,260
$4,260
Depreciation
$2,758
$4,727
$3,376
$2,411
$1,723
$1,722
$1,723
Investment Activities:
Investment
Salvage
Gains Tax
$2,500
$5,363
$6,151
$5,610
$5,224
$4,949
$4,949
$4,949
$4,604
$4,260
$7,060
$2,758
$4,727
$3,376
$2,411
$1,723
$1,722
$1,723
Taxable Income
$4,342
$2,373
$3,724
$4,689
$5,377
$5,378
$5,377
$6,239
$7,100
$7,100
Income Taxes (40%)
$1,737
$1,490
$1,876
$2,151
$2,151
$2,151
$2,496
$2,840
$2,840
Net Income
$2,605
$1,424
$2,235
$2,814
$3,226
$3,227
$3,226
$3,744
$4,260
$4,260
ST 10.4 Given:
• Savings = $314,000 + $35,000 = $349,000 per year
(a) Equity financing (retained earnings):
Input Output
Tax Rate(%)= 40 PW(i)= $181,889
MARR(%)= 20 IRR(%)= 50.80%
0 1 2 3 4 5 6
Income Statement
Cash Flow Statement
Revenues (savings) $349,000 $349,000 $349,000 $349,000 $349,000 $349,000
Expenses:
O&M costs $36,000 $36,000 $36,000 $36,000 $36,000 $36,000
Resin $140,000 $140,000 $140,000 $140,000 $140,000 $140,000
(b) Debt financing (term loan): annual installment = $212,000(A/P, 13%, 6) = $53,032
Tax Rate(%)= 40 PW(i)= $244,004
MARR(%)= 20 IRR(%)= #NUM!
0 1 2 3 4 5 6
Income Statement
Revenues (savings) $349,000 $349,000 $349,000 $349,000 $349,000 $349,000
Expenses:
O&M costs $36,000 $36,000 $36,000 $36,000 $36,000 $36,000
Cash Flow Statement
Operating Activities:
Net Income 49,824 48,547 67,074 79,380 82,246 92,813
Depreciation 42,400 67,840 40,704 24,422 24,422 12,211
(c) Lease financing (financial lease):
Tax Rate(%)= 40 PW(i)= $185,396
MARR(%)= 20 IRR(%)= 156.94%
0 1 2 3 4 5 6
Income Statement
Revenues (savings) $349,000 $349,000 $349,000 $349,000 $349,000 $349,000
Expenses:
O&M costs $36,000 $36,000 $36,000 $36,000 $36,000 $36,000
(d) The best financing method is the term loan option.
Cash Flow Statement
ST 10.5 (a) The net cash flows for each alternative over 10 years:
• Installing AGVS:
Input Data Output
Tax Rate(%)= 35 PW(15%)= ($167,864)
MARR(%)= 15
Financial Data
year 0 1 2 3 4 5 6 7 8 9 10
Depreciation $22,721 $38,939 $27,809 $19,859 $14,199 $14,183 $14,199 $7,091 $0 $0
Cash Flow Statement (all units in thousands of dollars)
0 1 2 3 4 5 6 7 8 9 10
Investment ($159,000)
Net proceeds from sale
• Leasing gas–powered lift trucks (payable at the end of each year):
total annual expenses = $5,465 + $6,317
(b) & (c) The incremental cash flows (AGVS option – Gas truck option)
agvs – gas
PW( ) $13,000 $11,933( / , ,1)
i P Fi
=−+