Chapter 10 Problems 1-36 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadshe the "Analysis ToolPak" or "Solver Add-In" be To install these, click on the Office button then "Excel Options," "Add-Ins" and select "Go." Check "Analyis ToolPak" and "Solver Add-In," then click "OK."
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Chapter 10Problems 1-36
Input boxes in tanOutput boxes in yellowGiven data in blueCalculations in redAnswers in green
NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-In" be installed in Excel.To install these, click on the Office button then "Excel Options," "Add-Ins" and select"Go." Check "Analyis ToolPak" and "Solver Add-In," then click "OK."
NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-In" be installed in Excel.
Chapter 10Question 1
Input area:
Purchase price $ 6,000,000 Appraised value $ 6,400,000 Cost to build $ 14,200,000 Grading costs $ 890,000
Output area:
The acquisition cost is a sunk cost. The appraisal value is an opportunity cost and should be included. The cost to build and grading costs are investments in fixed assets and are included.
Total initial cost $ 21,490,000
Chapter 10Question 2
Input area:
Camper quantity 19,000 Camper price $ 13,000 Increased motor home quantity 4,500 Motor home price $ 53,000 Lost motor coach quantity 900 Motor coach price $ 91,000
Output area:
Camper sales $ 247,000,000 Increased motor home sales 238,500,000 Lost motor coach sales (81,900,000)Total sales $ 403,600,000
Initial investment $ 720,000 Pretax salvage value $ 75,000 Cost savings per year $ 260,000 Working capital reduction $ (110,000)Tax rate 35%*Depreciation straight-lineover life 5
Initial investment $ 720,000 Pretax salvage value $ 75,000 Cost savings per year $ 300,000 Cost savings per year $ 240,000 Working capital reduction $ (110,000)Annual depreciation charge $ 144,000 Aftertax salvage value $ 48,750 Tax rate 35%Required return 20%*Depreciation straight-lineover life 5
Techron I :Cost $ 290,000 Operating costs per year $ 67,000 Life 3Techron II :Cost $ 510,000 Operating costs per year $ 35,000 Life 5Both:Salvage value $ 40,000 Tax rate 35%Discount rate 10%*Depreciation straight-line
The two milling machines have unequal lives, so they can only be compared by expressing both on an equivalent annual basis which is what the EAC method does.Thus, you prefer the Techron II because it has the lower(less negative) annual cost.
Chapter 10Question 18
Input area:
Quantity 185,000 Installation costs $ 940,000 Pretax salvage value $ 70,000 Fixed costs $ 305,000 Variable production cost per carton $ 9.25 Net working capital $ 75,000 Tax rate 35%Required return 12%*Depreciation staight-lineover life 5
Output area:
Aftertax salvage value $ 45,500.00 Depreciation tax shield $ 65,800.00 Initial cash outlay $ (1,015,000.00)NPV w/o OCF $ (946,625.06)Necessary OCF $ 262,603.01 OCF net of dep. tax shield $ 196,803.01
Bid price $ 12.54
Chapter 10Question 19
Input area:
Machine cost $ 560,000 Annual pretax cost $ 210,000 Salvage value $ 80,000 Inventory cost $ 20,000 Inventory cost per year $ 3,000 Tax rate 35%Discount rate 9%MACRS five year class 0.2000
If the system will not be replaced when it wearsout, then System Ashould be chosen, because it has the morepositive NPV.
Chapter 10Question 21
Input area:
System A:NPV $ (541,843.17)Operating life 4 System B:NPV $ (706,984.82)Operating life 6
Discount rate 11%
Output area:
System A:EAC $ (174,650.33)System B:EAC $ (167,114.64)
If the system is replaced, System Bshould be chosen because it has the lower EAC.
Chapter 10Question 22
Input area:
Quantity 100,000,000 Initial land cost $ 2,400,000 Land opportunity cost $ 2,700,000 Land value in 5 years $ 3,200,000 Machine cost $ 4,100,000 Pretax salvage value $ 540,000 Fixed costs $ 950,000 Variable cost $ 0.005 Initial NWC $ 600,000 Additional NWC/year $ 50,000 Tax rate 34%Required return 12%*Depreciation staight-lineover life 5
Output area:
Aftertax salvage value $ 356,400.00 Depreciation tax shield $ 278,800.00 Initial cash outlay $ (7,400,000.00)NPV w/o OCF $ (5,079,929.11)Necessary OCF $ 1,409,221.77 OCF net of dep. tax shield $ 1,130,421.77
Bid price $ 0.03163
Chapter 10Question 23
Output area:
At a given price, taking accelerated depreciation compared to straight-linedepreciation causes the NPV to be higher; similarly at a given price, lower net working capital investment requirements will cause the NPV to be higher. Thus,NPV would be zero at a lower price in this situation. In the case of a bid price, you could submit a lower price and still breakeven, or submit the higher priceand make a positive NPV.
At a given price, taking accelerated depreciation compared to straight-linedepreciation causes the NPV to be higher; similarly at a given price, lower net working capital investment requirements will cause the NPV to be higher. Thus,NPV would be zero at a lower price in this situation. In the case of a bid price, you could submit a lower price and still breakeven, or submit the higher price
Kilowatts used per hour 0.060 0.015 Kilowatt hours per year 30.00 7.50 Cost per year $ 3.0300 $ 0.7575 Expected life 1.00 24.00
Breakeven kilowatt/hr cost $ (0.007131)
Chapter 10Question 29
Input area:
Car mpg 25 Truck mpg 10 New car mpg 40 New truck mpg 12.5 Gas price $ 3.70 Miles per year 12,000
Output area:
Gallons used per year Current car 480.00 New car 300.00 Current truck 1,200.00 New truck 960.00
Gallons saved New car 180.00 New truck 240.00
Chapter 10Question 31
Input area:
Original cost of land $ 1,400,000 Current land value $ 1,500,000 Land value in 4 years $ 1,600,000 Marketing study $ 125,000 Year 1 sales 3,200 Year 2 sales 4,300 Year 3 sales 3,900 Year 4 sales 2,800 Sales price $ 780 Fixed costs $ 425,000 Variable costs 15%Equipment costs $ 4,200,000 Pretax salvage value $ 400,000 Net working capital $ 125,000 Tax rate 38%Required return 13%Year 1 depreciation 33.33%Year 2 depreciation 44.45%Year 3 depreciation 14.81%Year 4 depreciation 7.41%
Year 1 unit sales 93,000 Year 2 unit sales 105,000 Year 3 unit sales 128,000 Year 4 unit sales 134,000 Year 5 unit sales 87,000 Initial NWC $ 1,800,000 Additional NWC/year 15%Fixed costs $ 1,200,000 Variable cost per unit $ 265 Unit price $ 380 Equipment cost $ 24,000,000 Salvage value (% of price) 20%Tax rate 35%Required return 18%MACRS depreciation 14.29%
24.49%17.49%12.49%
8.93%
Output area:
Year 0 1Ending book value $ 20,570,400
Sales $ 35,340,000 Variable costs 24,645,000 Fixed costs 1,200,000 Depreciation 3,429,600 EBIT $ 6,065,400 Taxes 2,122,890 Net income $ 3,942,510
Year 1 depreciation $ 203,313.00 Year 2 depreciation $ 271,145.00 Year 3 depreciation $ 90,341.00 Year 4 depreciation $ 45,201.00
Year 1 depreciation CF $ 71,159.55 Year 2 depreciation CF $ 94,900.75 Year 3 depreciation CF $ 31,619.35 Year 4 depreciation CF $ 15,820.35 Initial cash outlay $ (665,000.00)NPV net of OCF $ (447,288.67)
Pretax cost savings $ 190,895.74
Chapter 10Question 34
Input area:
Quantity 185,000 Installation costs $ 940,000 Pretax salvage value $ 70,000 Fixed costs $ 305,000 Variable production cost per carton $ 9.25 Net working capital $ 75,000 Tax rate 35%Required return 12%*Depreciation straight-lineover life 5Price per carton $ 13.00
Output area:
Aftertax salvage value $ 45,500
a. Year 0 1Sales $ 2,405,000 Variable costs 1,711,250 Fixed costs 305,000 Depreciation 188,000 EBIT 200,750 Taxes 70,263 Net income 130,488 Depreciation 188,000 Operating cash flow $ 318,488
Net cash flowsOperating cash flow $ - $ 318,488 Change in NWC (75,000) - Capital spending (940,000) - Total cash flow $ (1,015,000) $ 318,488
Contract quantity 17,500 Equipment $ 3,400,000 Net working capital $ 95,000 Salvage value $ 275,000 Fixed costs $ 600,000 Variable costs/unit $ 175 Mkt. sales in Year 1 3,000 Mkt. sales in Year 2 6,000 Mkt. sales in Year 3 8,000 Mkt. sales in Year 4 5,000 Market price $ 285 Tax rate 40%Required return 13%Project NPV $ 100,000
Tax 132,000 264,000 352,000 220,000 Net income (and OCF) $ 198,000 $ 396,000 $ 528,000 $ 330,000
NPV of market sales $ 1,053,672.99 Initial investment $ 3,495,000 Aftertax salvage value $ 165,000
NPV of OCF $ 2,381,864.14 OCF $ 800,768.90
Bid price $ 253.17
Chapter 10Question 36
Input Area:
Old cost $ 650,000 New machine cost $ 780,000 Life of machine 5 Salvage value $ 150,000 Old machine depreciation $ 130,000 Old machine life left 3 MV old machine $ 210,000 Old machine value in 2 yrs $ 60,000 Saved operating costs $ 145,000 Discount rate 12%Tax rate 38%
Output Area:
a. New computer:Year 0 1Ending book value $ 780,000 $ 624,000