10.23 (a) and (b)
Input Output
Tax Rate(%) = 40 PW(i) = $6,782
MARR(%) = 14 IRR(%) = 16.12%
0 12345678
Income Statement
Revenues (savings) $48,000 $48,000 $48,000 $48,000 $48,000 $48,000 $48,000 $48,000
Expenses:
O&M cost 11000 11000 11000 11000 11000 11000 11000 11000
Cash Flow Statement
Operating Activities:
Net Income 6,339$ (2,579)$ 4,010$ 8,827$ 12,380$ 12,774$ 13,187$ 17,675$
Depreciation 21,435$ 36,735$ 26,235$ 18,735$ 13,395$ 13,380$ 13,395$ 6,690$
Generalized Cash Flow Method
10.24 (a) with no borrowed funds:
Input Data Output
Tax Rate(%) = 35 PW(9%) = $1,537
MARR(%) = 9
Financial Data
year 0 1 2 3 4 5
Depreciation 2,666$ 3,556$ 1,185$ 593$
Book value 8,000$ 5,334$ 1,778$ 593$ –$ –$
Cash Flow Statement
0 1 2 3 4 5
Investment ($8,000)
Net proceeds from sale $1,300
Investment in working capital
Recovery of working capital
(1 – 0.35) (Revenue) $1,625 $1,625 $1,625 $1,625 $1,625
(b) With borrowed funds:
(a) Input Data Output
Tax Rate(%) = 35 PW(9%) = $2,190
MARR(%) = 9
Financial Data
year 0 12345
Depreciation $2,666 $3,556 $1,185 $593
Book value $8,000 5,334 1,778 593 0 0
Salvage value $2,000
O&M costs
Cash Flow Statement
0 12345
Investment ($8,000)
Net proceeds from sale $1,300
Investment in working capital
Recovery of working capital
(c) Which alternative to choose? Equity financing option is more attractive.
10.25 Net cash flow
Input Data Output
Tax Rate(%) = 40 PW(12%) = $86,984
MARR(%) = 12
Financial Data
year 0 1 2 3 4 5
Depreciation 19,292$ 33,062$ 23,612$ 16,862$ 6,028$
Book value 135,000$ 115,709$ 82,647$ 59,036$ 42,174$ 36,146$
Cash Flow Statement
0 1 2 3 4 5
Investment ($135,000)
Net proceeds from sale $44,459
Investment in working capital
Recovery of working capital
Comparing Mutually Exclusive Alternatives
10.27
(a) The net after–tax cash flows for each financing option:
• Option 1: Retained earnings
Input Output
Tax Rate(%) = 39 PW(i) = $161,321
MARR(%) = 18 IRR(%) = 42.46%
Option 1: Financing with retained earnings
0 123456
Income Statement
Revenues (savings) $174,000 $174,000 $174,000 $174,000 $174,000 $174,000
Expenses:
Cash Flow Statement
Operating Activities:
Net Income 75,286$ 62,842$ 71,382$ 77,482$ 81,825$ 87,279$
Depreciation 28,580$ 48,980$ 34,980$ 24,980$ 17,860$ 8,920$
Investment Activities:
(b) Vermont’s PW cost of owning the equipment by borrowing:
Input Output
Tax Rate(%) = 39 PW(i) = $214,469
MARR(%) = 18 IRR(%) = 263.36%
Option 2: Owning the equipment by borrowing
0 123456
Income Statement
Revenues (savings) $174,000 $174,000 $174,000 $174,000 $174,000 $174,000
Expenses:
O&M costs $22,000 $22,000 $22,000 $22,000 $22,000 $22,000
Cash Flow Statement
Operating Activities:
Net Income $60,646 $50,006 $60,567 $68,930 $75,807 $84,099
Depreciation $28,580 $48,980 $34,980 $24,980 $17,860 $8,920
(c) Vermont’s PW cost of leasing the equipment:
Tax Rate(%) = 39 PW(i) = $170,092
MARR(%) = 18 IRR(%) = 101.06%
Option 3: Leasing the equipment
0 123456
Income Statement
Revenues (savings) $174,000 $174,000 $174,000 $174,000 $174,000 $174,000
Expenses:
O&M costs $22,000 $22,000 $22,000 $22,000 $22,000 $22,000
Leasing costs $55,000 $55,000 $55,000 $55,000 $55,000 $55,000
Debt interest
Cash Flow Statement
Operating Activities:
Net Income -$33,550 $59,170 $59,170 $59,170 $59,170 $59,170 $92,720
Depreciation
Investment Activities:
(d) Option2 is the best alternative.
10.28
• Option 1: Lease
lease
PW(12%) $144,000(1 0.40)(1 ( / ,12%, 29))
$779, 483.52
PA=− −+
= −
• Option 2: Purchase
o Note 1: It is assumed that the property is placed in service during
January.
0 1 2 3 4 29 30
Income Statement
Revenues:
Expenses:
Depreciation 15,972$ 16,667$ 16,667$ 16,667$ 16,667$ 15,972$
Cash Flow Statement
Operating Activities:
Net Income (33,583)$ (34,000)$ (34,000)$ (34,000)$ (34,000)$ (33,583)$
• Option 3: Remodel
o Note 1: Depreciation base: Remodeling cost = $300,000
Input Output
Tax Rate(% )= 40 PW(i) = ($494,425)
MARR(%) = 12
0 1 2 3 4 29 30
Income Statement
Revenues:
Expenses:
Depreciation 7,372$ 7,692$ 7,692$ 7,692$ 7,692$ 7,372$
Property tax 33,000$ 33,000$ 33,000$ 33,000$ 33,000$ 33,000$
Lease fee(Parking lot) $9,000 $9,500 $10,000 $10,500 $23,000 $23,500
Taxable Income (49,372)$ (50,192)$ (50,692)$ (51,192)$ (63,692)$ (63,872)$
10.29 Comparison by annual equivalent cost (all units in thousand dollars):
Book Value ( 20) $380.61 $423.80 $470.56
n=
Plant A
• Capital recovery cost with return:
1
($8,530 $669.94)( / ,12%, 20) $669.94(0.12) $1,132.69A AP=− +=
Plant B
• Capital recovery cost with return:
1
($9, 498 $744.66)( / ,12%, 20) $744.66(0.12) $1, 261.25A A P= − + =
Plant C
• Capital recovery cost with return:
1($10, 546 $826.82)( / ,12%, 20) $826.82(0.
12) $1, 400.41A A P= − + =
• After–tax O&M cost:
2
(1 0.39)($1,632) $995.52A= − =
Lease –Versus – Buy Decisions
10.30
(a) Prescott Welding’s cost of leasing in present worth:
(b) Prescott Welding’s cost of owning in present worth:
• PW of after–tax maintenance expenses:
• PW of tax credit (shield) on depreciation and interest:
n Dn In
Sum Combined tax
savings
1 $9,000 $5,400 $14,400 $5,760
• PW of net proceeds from sale:
Total depreciation amount= $34,632
Book value= $10,368
Salvage= $10,000
(c) Should the truck be leased or purchased? The leasing option is a better
choice.
10.31
(a) PW (incremental) cost of owning the equipment:
• PW of after–tax O&M
• PW of tax credit (shield) on depreciation and interest:
Combined Tax Savings
1 $24,000 $12,000 $36,000(0.40) = $14,400
2 $38,400 $9,414 $47,814(0.40) = $19,126
nn
nD I
• PW of net proceeds from sale:
total depreciation amount = $92,352
book value = $27,648
Input Output
Tax Rate(%) = 40 PW(i) = ($143,406)
MARR(%) = 15%
0 1 2 3 4
Income Statement
Revenues (savings)
Expenses:
Cash Flow Statement
Operating Activities:
Net Income (51,600)$ (58,689)$ (47,766)$ (36,212)$
Depreciation 24,000$ 38,400$ 23,040$ 6,912$
Investment Activities:
(b) PW (incremental) cost of leasing the equipment:
• PW of after–tax operating cost: common cost for both alternative, so we
can ignore this item in incremental analysis.
Input Output
Tax Rate(%) = 40 PW(i) = ($86,677)
MARR(%) = 15%
0 1 2 3 4
Income Statement
Revenues (savings) $0 $0 $0 $0
Expenses:
(c) Should ICI buy or lease the equipment? The buying option is a better choice.
10.32
(a) PW of after–tax cash flow of leasing:
Cash Flow Statement