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    CH 12 SM Assig

    Uploaded by

    Jefferson Sarmiento
    The document contains sample problems and solutions for calculating cash flow, payback period, internal rate of return, and net present value. Problem 12-1 shows how to calculate cash flow for a corporation given earnings before depreciation and taxes, depreciation, tax rate, and earnings after taxes. Problem 12-3 demonstrates calculating payback periods for two alternative investments to determine which has the faster payback. Problem 12-7 uses a financial table to calculate the internal rate of return for an investment. Problem 12-11 uses the net present value method to determine if an investment should be undertaken given the project's cash inflows, outflows, and cost of capital.

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    CH 12 SM Assig

    Uploaded by

    Jefferson Sarmiento
    66 views6 pages
    The document contains sample problems and solutions for calculating cash flow, payback period, internal rate of return, and net present value. Problem 12-1 shows how to calculate cash flow for a corporation given earnings before depreciation and taxes, depreciation, tax rate, and earnings after taxes. Problem 12-3 demonstrates calculating payback periods for two alternative investments to determine which has the faster payback. Problem 12-7 uses a financial table to calculate the internal rate of return for an investment. Problem 12-11 uses the net present value method to determine if an investment should be undertaken given the project's cash inflows, outflows, and cost of capital.

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    The document contains sample problems and solutions for calculating cash flow, payback period, internal rate of return, and net present value. Problem 12-1 shows how to calculate cash flow for a corporation given earnings before depreciation and taxes, depreciation, tax rate, and earnings after taxes. Problem 12-3 demonstrates calculating payback periods for two alternative investments to determine which has the faster payback. Problem 12-7 uses a financial table to calculate the internal rate of return for an investment. Problem 12-11 uses the net present value method to determine if an investment should be undertaken given the project's cash inflows, outflows, and cost of capital.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    66 views6 pages

    CH 12 SM Assig

    Uploaded by

    Jefferson Sarmiento
    The document contains sample problems and solutions for calculating cash flow, payback period, internal rate of return, and net present value. Problem 12-1 shows how to calculate cash flow for a corporation given earnings before depreciation and taxes, depreciation, tax rate, and earnings after taxes. Problem 12-3 demonstrates calculating payback periods for two alternative investments to determine which has the faster payback. Problem 12-7 uses a financial table to calculate the internal rate of return for an investment. Problem 12-11 uses the net present value method to determine if an investment should be undertaken given the project's cash inflows, outflows, and cost of capital.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 6

    Chapter 12

    Problems
    12-1. Assume a corporation has earnings before depreciation and taxes of $100,000,
    and depreciation of $50,000, and that it has a 30 percent tax bracket. Compute
    its cash flow using the format below.

    Earnings before depreciation and taxes


    Depreciation
    Earnings before taxes
    Taxes @ 30%
    Earnings after taxes
    Depreciation
    Cash flow

    Solution:

    Earnings before depreciation and taxes $100,000


    Depreciation – 50,000
    Earnings before taxes 50,000
    Taxes @ 30% 15,000
    Earnings after taxes 35,000
    Depreciation + 50,000
    Cash flow $ 85,000

    12-3. Assume a $50,000 investment and the following cash flows for two alternatives.

    Year Investment A Investment B


    1 ............ $10,000 $20,000
    2 ............ 11,000 25,000
    3 ............ 13,000 15,000
    4 ............ 16,000
    5 ............ 30,000

    Which alternative would you select under the payback method?

    Solution:
    Payback for Investment A Payback for Investment B
    $50,000 – $10,000 1 year $50,000 – $20,000 1 year
    40,000 – 11,000 2 years 30,000 – 25,000 2 years
    29,000 – 13,000 3 years 5,000/15,000 .33 years
    16,000 – 16,000 4 years

    Payback Investment A = 4.00 years


    Payback Investment B = 2.33 years
    Investment B would be selected because of the faster
    payback.

    12-7. You buy a new piece of equipment for $11,778, and you receive a cash inflow
    of $2,000 per year for 10 years. What is the internal rate of return?

    Solution:

    Appendix D

    $11,778
    PVIFA = = 5.889
    $2, 000

    IRR = 11%

    For n = 10, we find 5.889 under the 11% column.

    12-11. Hamilton Control Systems will invest $90,000 in a temporary project that will
    generate the following cash inflows for the next three years.

    Year Cash Flow


    1 ....................................... $23,000
    2 ....................................... 38,000
    3 ....................................... 60,000

    The firm will be required to spend $15,000 to close down the project at the end
    of the three years. If the cost of capital is 10 percent, should the investment be
    undertaken? Use the net present value method.
    undertaken? Use the net present value method.

    Solution:
    Hamilton Control Systems

    Present Value of inflows

    Year Cash Flow * PVIF at 10% Present Value


    1 $23,000 .909 $20,907
    2 38,000 .826 31,388
    3 60,000 .751 45,060
    $97,355

    Present Value of outflows

    0 $90,000 1.000 $ 90,000


    3 15,000 .751 11,265
    $101,265

    Present Value of inflows $ 97,355


    Present Value of outflows 101,265
    Net present value ($ 3,910)

    12-22. The Summit Petroleum Corporation will purchase an asset that qualifies for
    three-year MACRS depreciation. The cost is $80,000 and the asset will provide
    the following stream of earnings before depreciation and taxes for the next four
    years:

    Year 1 ............................... $36,000


    Year 2 ............................... 40,000
    Year 3 ............................... 31,000
    Year 4 ............................... 19,000

    The firm is in a 35 percent tax bracket and has an 11 percent cost of capital.
    Should it purchase the asset? Use the net present value method.

    Solution:
    Summit Petroleum Corporation
    First determine annual depreciation.

    Percentage
    Depreciation Depreciation Annual
    Year Base (Table 12-9) Depreciation
    1 $80,000 .333 $26,640
    2 80,000 .445 35,600
    3 80,000 .148 11,840
    4 80,000 .074 5,920
    $80,000

    Then determine the annual cash flow.

    1 2 3 4
    EBDT $36,000 $40,000 $31,000 $19,000
    –D 26,640 35,600 11,840 5,920
    EBT 9,360 4,400 19,160 13,080
    T (35%) 3,276 1,540 6,706 4,578
    EAT 6,084 2,860 12,454 8,502
    +D 26,640 35,600 11,840 5,920
    Cash
    Flow $32,724 $38,460 $24,294 $14,422

    Then determine the net present value.

    Cash Flow
    Year (inflows) PVIF at 11% Present Value
    1 $32,724 .901 $29,484
    2 38,460 .812 31,230
    3 24,294 .731 17,759
    4 14,422 .659 9,504

    Present value of inflows $87,977


    Present value of outflows 80,000
    Net present value $ 7,977

    The asset should be purchased based on the new present


    value.

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