Chap 3 HW Assigned Prob 1, 3, 4 Answers-1
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Chap 3, prob 1 Chapter 3 Problem 1 Info: TelCo to decide if replace computer system cost of capital 12% tax rate 35% SL depre (000's) Year 1 2 3 4 5 ($) 350 350 300 300 300 Cost of new comp 1,000 depre/yr200 ITC 15% first year ITC reduces Telco's taxes by an amt = to 15% of equipment purchase price 150 ITC amt yr 1 old computer can be sold for 450 cost of old computer 1,250 3 years old life 5 yrs both computers have -0- salvage value no ITC on old computer a. What is the net investment required in the new system? Net Investment = Cost - Salvage(old) + Tax from sale of old Book value of old machine cost 1,250 cost of new machine 1,000 3 yrs old SL D/E 750 sale price of old machine (450) Book value of old machine 500 tax from sale of old (18) old computer can be sold f 450 Net Investment $532.50 proceeds/loss (50) tax rate 35% tax (18) b. Estimate the incremental operating CF's associated with the new system Incremental CF's = after tax savings + (tax x net depreciation) discount rate 12% Year 1 2 3 4 5 Net BEFORE tax cost savings ($) 350 350 300 300 300 Tax at 35% tax rate 123 123 105 105 105 ITC tax credit yr 1 150 after tax savings 78 228 195 195 195 add: (tax x depre) of new comp (50) (50) 200 200 200 CF 28 178 395 395 395 $922.37 NPV or CF's Salvage value of new machine 100 given investment (532.50) tax on salvage value (35) NPV 389.87 Incremental CF's 28 178 395 395 460 Net BEFORE tax cost savings
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Transcript of Chap 3 HW Assigned Prob 1, 3, 4 Answers-1
Chap 3, prob 1Chapter 3Problem 1Info:TelCo to decide if replace computer systemcost of capital12%tax rate35%SL depre(000's)Year12345Net BEFORE tax cost savings($)350350300300300Cost of new comp1,000depre/yr200ITC15%first yearITC reduces Telco's taxes by an amt = to 15% of equipment purchase price150ITC amt yr 1old computer can be sold for450cost of old computer1,2503 years oldlife5yrsboth computers have -0- salvage valueno ITC on old computera. What is the net investment required in the new system?Net Investment = Cost - Salvage(old) + Tax from sale of oldBook value of old machinecost1,250cost of new machine1,0003 yrs old SL D/E750sale price of old machine(450)Book value of old machine500tax from sale of old (18)old computer can be sold for450Net Investment$532.50proceeds/loss(50)tax rate35%tax (18)
b. Estimate the incremental operating CF's associated with the new systemIncremental CF's = after tax savings + (tax x net depreciation)discount rate12%Year12345Net BEFORE tax cost savings($)350350300300300Tax at 35% tax rate123123105105105ITC tax credit yr 1150after tax savings78228195195195add: (tax x depre) of new comp(50)(50)200200200CF28178395395395$922.37NPV or CF'sSalvage value of new machine100giveninvestment(532.50)tax on salvage value(35)NPV389.87Incremental CF's28178395395460
PV =$959.25investment(532.50)NPV =$426.75The new computer should be purchased
c. If the new computer's salvage value at the end of 5 years is projected to be$100,000, should TelCo purchase it?salvage value$100Book Valuecost1,0005 yr life D/E1,000Book value0.0
Pay tax on:100salvage - BVtax rate35%tax amt35
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Chap 3, prob 3Chapter 3Problem 3Info:VaricoUnits sold/year100,000Ea. Unit needs electric motor, purchased 1 time per weekCost per motor$10.00Interest rate 15%Purchase amount100,000average inventory on hand (divide purchase amt by 2)50,000Foreign Firm to sell 100,000 motors at 9.50 ea.Calculate the Opportunity cost of maintaining inventory =avg. # of units on hand50,000price / unit$9.50$475,000.00interest rate15%Opportunity cost of maintaining inventory =$71,250
By buying the inventory weekly, no interest expense incurred.The real cost of buying 100,000 motors today =Units sold per yr x price per unit950,000Opportunity cost of maintaining inventory =71,250Result, does this exceed the cost to purchase weekly? A$1,021,250Aexceeds cost to purchase weeklyCost of purchasing motors weekly B$1,000,000Bdiff A - B(21,250)Continue to purchase the motors weekly
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Chap 3, prob 4Chapter 3Problem 4Info:Specific Foods, Inc.i). Calculate net income & operating CF'sDiscount Rate10%012345678910Equipment purchase(1,250,000)Installation costs(25,000)a). Revenue$200,000$1,000,000$1,150,000$1,322,500$1,520,875$1,749,006$1,749,006$1,486,655$1,263,657$1,074,108b). COGS @ 60% of sales(120,000)(600,000)(690,000)(793,500)(912,525)(1,049,404)(1,049,404)(891,993)(758,194)(644,465)GM80,000400,000460,000529,000608,350699,603699,603594,662505,463429,643Advertising & G&A(10,000)(10,000)(10,000)(10,000)(10,000)(10,000)(10,000)(10,000)(10,000)(10,000)D/E on equipment; 10 yr life, SL(125,000)(125,000)(125,000)(125,000)(125,000)(125,000)(125,000)(125,000)(125,000)(125,000)D/E on installation, 5 yr life, SL(5,000)(5,000)(5,000)(5,000)(5,000)Initial costs/expenses on equipmentEBIT(60,000)260,000320,000389,000468,350564,603564,603459,662370,463294,643Taxes @ 35%21,000(91,000)(112,000)(136,150)(163,923)(197,611)(197,611)(160,882)(129,662)(103,125)Net Income(39,000)169,000208,000252,850304,428366,992366,992298,780240,801191,518Add back:Deprec130,000130,000130,000130,000130,000125,000125,000125,000125,000125,000OCF's91,000299,000338,000382,850434,428491,992491,992423,780365,801316,518PV =$2,120,065.46
ii). Find NPV using 10% cost of capitalCost today:Equipment cost1,250,000Installation25,000Initial expensed costs875,000givenTax on the exp initial costs(306,250)Net Investment$1,843,750PV$2,120,065.46Less: investment(1,843,750)NPV:$276,315The project should be accepted.
iii). Adding inflation, what is the project's NPV?Discount Rate10%012345678910Equipment purchase(1,250,000)Installation costs(25,000)a). Revenue$200,000$1,000,000$1,150,000$1,322,500$1,520,875$1,749,006$1,749,006$1,486,655$1,263,657$1,074,108b). COGS @ 60% of sales (will grow 20%/yr from 600K level, until yr 6, remain same for yr 7, then decline 15%/yr through yr 10)(120,000)(600,000)(720,000)(864,000)(1,036,800)(1,244,160)(1,244,160)(1,057,536)(898,906)(764,070)GM80,000400,000430,000458,500484,075504,846504,846429,119364,751310,039Advertising & G&A (5% inflation)(10,000)(10,500)(11,025)(11,576)(12,155)(12,763)(13,401)(14,071)(14,775)(15,513)D/E on equipment; 10 yr life, SL(125,000)(125,000)(125,000)(125,000)(125,000)(125,000)(125,000)(125,000)(125,000)(125,000)D/E on installation, 5 yr life, SL(5,000)(5,000)(5,000)(5,000)(5,000)Initial costs/expenses on equipmentEBIT(60,000)259,500288,975316,924341,920367,083366,445290,048224,977169,525Taxes @ 35%21,000(90,825)(101,141)(110,923)(119,672)(128,479)(128,256)(101,517)(78,742)(59,334)Net Income(39,000)168,675187,834206,000222,248238,604238,189188,531146,235110,192Add back:Deprec130,000130,000130,000130,000130,000125,000125,000125,000125,000125,000OCF's91,000298,675317,834336,000352,248363,604363,189313,531271,235235,192PV =$1,760,160.45
ii). Find NPV using 10% cost of capitalCost today:Equipment1,250,000Installation25,000Initial expensed costs (not depre)875,000givenTax on the exp initial costs (35%)(306,250)Investment$1,843,750PV$1,760,160.45Less: investment(1,843,750)NPV:($83,590)The project should be rejected
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