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CHAPTER 10
MAKING CAPITAL INVESTMENT
DECISIONS
Answers to Concepts Review and Critical Thinking Questions
1. In this context, an opportunity cost refers to the value of an asset or other input that will be used in a
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Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple
steps. Due to space and readability constraints, when these intermediate steps are included in this solutions
manual, rounding may appear to have occurred. However, the final answer for each problem is found
without rounding during any step in the problem.
Basic
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3. We need to construct a basic income statement. The income statement is:
5. To calculate the OCF, we first need to calculate net income. The income statement is:
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The top-down approach to calculating OCF yields:
6. The MACRS depreciation schedule is shown in Table 10.7. The ending book value for any year is the
7. The asset has an eight-year useful life and we want to find the BV of the asset after five years. With
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8. To find the BV at the end of four years, we need to find the accumulated depreciation for the first four
9. Using the tax shield approach to calculating OCF (Remember the approach is irrelevant; the final
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11. The cash outflow at the beginning of the project will increase because of the spending on NWC. At
NPV = $104,622.30
12. First we will calculate the annual depreciation for the equipment necessary for the project. The
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13. First we will calculate the annual depreciation of the new equipment. It will be:
14. First we will calculate the annual depreciation of the new equipment. It will be:
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15. To evaluate the project with a $200,000 cost savings, we need the OCF to compute the NPV. Using
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17. We will need the aftertax salvage value of the equipment to compute the EAC. Even though the
18. To find the bid price, we need to calculate all other cash flows for the project, and then solve for the
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Intermediate
19. First, we will calculate the depreciation each year, which will be:
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20. If we are trying to decide between two projects that will not be replaced when they wear out, the proper
21. If the equipment will be replaced at the end of its useful life, the correct capital budgeting technique
22. To find the bid price, we need to calculate all other cash flows for the project, and then solve for the
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23. At a given price, taking accelerated depreciation compared to straight-line depreciation causes the
24. Since we need to calculate the EAC for each machine, sales are irrelevant. EAC only uses the costs of
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26. To solve the EAC algebraically for each bulb, we can set up the variables as follows:
