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Chapter 12

Chapter 12. Estimating Cash Flows on Capital Budgeting Projects. Problem 1. Which of these capital investment analysis techniques facilitates comparison of projects with unequal useful lives? Internal rate of return Equivalent annual annuity Net present value

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Chapter 12

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  1. Chapter 12 Estimating Cash Flows on Capital Budgeting Projects

  2. Problem 1 Which of these capital investment analysis techniques facilitates comparison of projects with unequal useful lives? • Internal rate of return • Equivalent annual annuity • Net present value • Modified internal rate of return

  3. Problem 1 Answer • Answer: B The other responses are capital budgeting calculation methods

  4. Problem 2 At the conclusion of your project, your company sells a fixed asset for $200,000. The asset’s book value is $148,000, and the firm’s tax rate is 34 percent. Calculate the after-tax cash flow from this sale

  5. Problem 2 Answer Alternately: ATCF = Book Value + (MV – BV) x (1 – T) = 148,000 + (200,000 – 148,000) x (1 - .34) = 182,320

  6. Problem 3 A firm purchases a machine for $2,000,000 which has a class life of 3 years MACRS. The firm’s cost of capital is 12 percent. When calculating operating cash flows, what is the present value of the tax benefits from depreciation?

  7. Problem 3 Answer Present value of tax benefits:

  8. Problem 4 You are evaluating the proposed acquisition of a machine that costs $220,000. The machine will result in increased sales of $120,000 per year for 3 years, but costs will increase by $25,000 per year. The machine will be depreciated 3 years MACRS and will be sold for an estimated $50,000 after 3 years. NWC will increase by $75,000 and remain constant for the life of the project. The firm’s tax rate is 40 percent and discount rate is 9 percent. Calculate the project’s cash flows.

  9. Problem 4 Answers • Initial outlay:

  10. Operating Cash Flow:

  11. Terminal Cash Flow: • Book value after year 3 = $16,302 • Gain on sale = $50,000 - $16,302 = $33,698

  12. Putting it Together Alternatively:

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