Finance Intro Homework

Q.1
Suppose a $10,700 investment will yield 3
annual cash flows of $3,500 each. With a
discount rate of 12%, what is the PI?

PI= PV(inflows)/PV(outflows) Total:

Cash #1: 8406.40944
3125 PI:
Cash #2: $0.7856
2790.17857142857
Cash #3:
2491.23086734694
Q.2 Rainbow Product Example (lecture 1)
Calculate the net present value (NPV) for the following
project. The project requires an initial investment of $18,000
and provides 5 annual cash inflows of $20,600. Assume a cost
of capital of 5.2%.

Model S
Year 1 Year
19581.7490494297 0
Year 2 1
18613.8298948951 2
Year 3 3
17693.7546529421 4
Year 4
16819.1584153442 0.333333333333333
Year 5 2
15987.7931704793 2.33333333333333

NPV
88696.2851830904
70696.2851830904
Example (lecture 1)

Model L
Annual Cumalative
-1000 -1000
500 -500
400 -100
300 200
100 300
Top Hat Q1 Top Hat #2
A project requires an investment of $1,000 today Consider a one year project with a $100 investment
and will generate cash flows of $600 at the end of due immediately and $110 cash flow in one year. The
each of the next two years (see time line). How cost of capital is 5%. What is the NPV?
many years will it take to get your $1,000 back?

1.66666666666667 104.761904761905
4.76190476190476
IRR
Consider a one year project with a $100
investment due immediately and $110
cash flow in one year. The cost of capital
is 5%. What is the IRR?

104.761904761905 NPV = 4.76

-1677717% 4.76190476
100
110

10%
USE ONLINE IRR CALCULATOR
Top Hat
Lumberjack Inc. wants to purchase a wood-cutting machine. It is considering
two different machines, option S and option L. Both machines cost $75. Model S
generates $90 of revenues at the end of the first year and nothing at the end of
the second year. Model L no generates revenues at the end of the first year and
$100 at the end of the second year. Compute the NPVs of both Models when k
= 5%, 11.11% and 15% . What is the NPV of Model L at 15%?

Model S Revenue
Year 1 90
Year 2 0
85.7142857
0
NPV= 10.7142857

81.00081
NPV= 6.00081001

78.2608696
NPV= 3.26086957
Model L Revenue
0
100
0 k= 5%
90.7029478
NPV 25
k= 11.11%
81.00162
NPV= 6.00162002

75.6143667 k= 15%
NPV= 0.61436673
Graph the NPV of each model with the
cost of capital on the x-axis. (The lines
are called NPV profiles.) If the cost of
capital is below 11.11% then ___ is
best, but if the cost of capital is above
11.11%, then __ is best.
TABLE % VS. NPV S L
5% 10.7142857 25
11% 6.00081001 6.00162002
15% 3.26086957 0.61436673

below 11% Model L

Above 11% Model S
Rank the three projects by PI from highest (#1) to
lowest (#3). Enter the ranks in the last column. If
you only had $20 million to invest, which two
projects would you choose if you want the two
highest ranked projects by PI?
a 1.19444444
b 1.2
c 1.18
Practice Homework:

Suppose​​you're​presented​with​a​proposal​for​a​
project​that​costs​​$4,200​and​will​bring​in​​
$20,600​the​first​year.​The​next​​year,​you'll​have​
to​pay​out​​$16,000.​With​a​cost​of​capital​of​13​
%,​calculate​the​net​present​value​​(NPV)​for​this​
project
NPV: YEAR 1
18230.0884955752
NPV: YEAR 2
12530.3469339807

NPV TOTAL:
1499.74156159448
Project​L​has​a​cost​of​​$52,000.​Its​expected​net​
cash​inflows​are​​$80,000​per​year​for​8​years.​The​
cost​of​capital​is​6%.​Calculate​the​​project's​
payback​​period​(PB),​net​present​value​​(NPV),​
profitability​index​​(PI),​and​internal​rate​of​return​​
(IRR)

Payback:
0.65
PVIF-NPV:
$496,783.50
NPV:
$444,783.50

PI:
$ 9.55

$100.00

$1.04
Coffee Slurp is considering including a new expresso
machine in this year's capital budget. The cash outlay for the
machine is $2,130. The firm's cost of capital is 7.1%. After-
tax cash flows, including depreciation, are as shown in the
table below. Calculate the net present value (NPV) for this
project.

PVIF:
$2,903.36

NPV:
$773.36
A project has an initial investment of $200,000 and will
generate 5 annual cash flows of $60,000. Assume a cost of
capital of 15%. Calculate the profitability index (PI).

PVIF:
$201,129.31

PI:
$1.01
What is the payback for a project that requires a $10,100
initial investment and returns $3,200 the next year and
$2,100 per year after that?

Year: Cash Inflow Cumulative

0 -10100 -10100
1 3200 -6900
2 2100 -4800
3 2100 -2700
4 2100 -600
5 2100 1500

Year 4:
Months: 0.28571429
Multiply by 12: 3.42857143

Therefore 4 Years and 3​Months

Q1 Intro Homework Slides #1
What is the average cost of debt if Preferred stock is 92$/share.
the YTM is 12% and the tax rate is Annual dividend is 2.46$ what is
10%
required rate of return?

2.674%
0.108
10.8
Tophat
Pretax cost of debt is 11%, prefered is 14%,
equity is 15%. What is WACC assuming taxrate of
40%, cost of debt is 40%, preffered is 20%, and
equity is 40%

Debt:
0.066
0.0264
Preferred
0.14
0.028
Equity
0.15

0.06

11.44%
Top Hat
The Loose Wheel Motor Corp. has bonds outstanding
with one year remaining to maturity. The bonds pay
annual coupons at a rate of 5%. The face value of each
bond is $1,000 and they are trading for $975. What is
the yield to maturity on the bonds?

coupon payment =
$50.00

7.692%
USE RATE FORMULA
Top Hat
Armstrong Inc. is planning to issue new debt.
Armstrong can currently issue debt that has an annual
coupon interest rate of 10%, pays interest semi-
annually, and has 20 years to maturity. The face value
of each bond is $1,000. The new issue will net $1,198
per bond. What is the firm’s cost of debt?

Coupon:
i=
0.1
100
50

4.000%
8%
Remember to multiply origanal rate by how many
payments per year
Practice Questions
A firm plans to sell 12 million shares of common stock and
200,000 bonds. Each bond will have a coupon rate of 5% and
will have a face value of $1,000. The common stock will be
issued at a price of $19.50 a share. The bonds will sell for 89%
of face value. The after-tax cost of debt is 4% and the cost of
equity is 9.275%. What is the firm’s WACC?

Equity:
234000000
Debt:
178000000

Total:
412000000

Weight of equity:

0.567961165048544

Weight of debt:
0.432038834951456

Total:
Debt:
0.017281553398058

Equity:
0.052678398058253

Total:
0.069959951456311
Colt​Manufacturing​has​two​​divisions:​1)​​
pistols;​and​​2)​rifles.​Betas​for​the​two​
divisions​have​been​determined​to​be​
beta​​(pistol)​=​0.7​and​beta​​(rifle)​=​1.1.​
The​current​​risk-free​rate​of​return​is​2​
%,​and​the​expected​market​rate​of​
return​is​7.5%.​The​​after-tax​cost​of​debt​
for​Colt​is​8​%.​The​pistol​​division's​
financial​proportions​are​37.5​%​debt​and​
62.5​%​​equity,​and​the​rifle​​division's​are​
47.5​%​debt​and​52.5​%​equity

Pistol:
Equity:
.02+.7(.075-.02)
0.0585

Weight of equity:
3.66

Weight of Debt:

WACC of Pistol:
6.66
Pan​American​​Airlines'​shares​are​currently​ ​ red's​Lawn​and​​Garden's​last​
F
trading​at​​$67.62​each.​The​yield​on​Pan​Am's​ dividend​per​share​was​​$2.76.​The​
debt​is​6​%​and​the​​firm's​beta​is​0.6.​The​​T-Bill​ stock​sells​for​​$19​per​​share,​and​the​
rate​is​5​%​and​the​expected​return​on​the​ expected​growth​rate​for​the​company​
market​is​10​%.​The​​company's​target​capital​ is​8​%.​Calculate​the​​company's​cost​of​
structure​is​35%​debt​and​65​%​equity.​Pan​ equity.
American​Airlines​pays​a​combined​federal​and​
state​tax​rate​of​38​%.​What​is​the​estimated​
cost​of​common​​equity,​employing​the​Capital​
Asset​Pricing​Model​​(CAPM)?

R: 5% 2.9808
Beta: .06 0.156884210526316
Market return: .10 0.236884210526316
Rate: 5%
0.08
1.15
0.038333333333333
0.088333333333333
Pan​American​​Airlines'​shares​are​currently​
trading​at​​$63.07​each.​What​is​the​estimated​
cost​of​common​​equity,​employing​the​
constant​growth​dividend​discount​​model?​
Assume​that​Pan​Am​pays​annual​dividends​
and​that​the​last​dividend​of​​$2.13​per​share​
was​paid​yesterday.​Pan​Am​started​paying​
dividends​3​years​ago.​The​first​dividend​was​​
$1.76​per​share

rate:
1.21022727272727
1.06566894948429
0.065668949484294

Cost:
1.06566894948429
2.26987486240155

0.035989771086119

0.101658720570413
Deep Dive Salvage has preferred stock Growfast​Construction​has​
outstanding. What is the after-tax cost if the par preferred​stock​outstanding​that​
value of the preferred share is $100 and the
annual dividend is $4.50. The preferred shares pays​a​dividend​of​​$2.36​per​year.​
have no stated maturity. The current market The​current​market​price​of​the​
price of the share is $50. Assume that the preferred​stock​is​​$42.​What​is​the​
corporate tax rate is 30% cost​of​preferred​stock​to​​
Growfast?

0.09 0.056190476190476
MCG​Company​decided​to​sell​perpetual​
(never​matures)​preferred​stock​with​an​8%​
yield​(pays​out​8%​of​par​as​dividend).​If​the​
stock​had​a​par​value​of​$150,​and​the​
stated​flotation​costs​would​amount​to​2%​of​
the​par​value​(flotation​cost​being​the​
amount​it​costs​to​actually​sell​the​security—
the​price​received​by​the​firm​is​net​of​sales​
price​minus​flotation​cost),​what​is​the​cost​
of​the​perpetual​preferred​stock?

3
147

12
0.081632653061225
Denver​Ski​Lodge​has​outstanding​debt​
currently​selling​for​$890.​It​matures​in​5​
years,​pays​interest​semi-annually,​and​
has​an​8%​coupon​payment.​If​par​is​
$1,000​and​the​tax​rate​is​40%,​what​is​
the​after-tax​cost​of​debt?

5.456%
0.109125743252527

1-.4
0.6
0.065475445951516

Convert to annual rate

National Bank just issued a new 40-year, non- Tiny Tots has debt outstanding, currently
callable bond at par (the current price of the bond selling for $900 per bond. It matures in 20
is $1,000). This bond requires a coupon rate of 17% years, pays interest annually, and has a 11
with semiannual payments and has a par value of % coupon rate. Par is $1,000, and the
$1,000. The tax rate is 35%. What is the after-tax firm's tax rate is 38%. What is the after-tax
cost of debt?
cost of debt?

8.50% 12%
0.17 1.38
1-.35 0.62
0.65 0.076693681480968
0.1105
What is the after-tax cost of the following preferred
equity? The par value of the preferred share is
$100 and the annual dividend is 6%. The preferred
shares have no stated maturity. The current market
price of the share is $70. Assume that the corporate
tax rate is 30%

0.085714285714286

a.

b.

c.

d.

e.

f.

g.
Using​the​balance​sheet​provided​for​Universal​​Exports,​
determine​the​weighted​average​cost​of​capital.​The​​
firm's​tax​rate​is​30​%,​the​preferred​stock​pays​a​
dividend​of​​$0.50​per​​share,​the​beta​of​the​stock​is​
1.63​,​the​market​risk​premium​is​5%,​and​the​​risk-free​
rate​is​3​%.​Assume​that​the​book​value​capital​
structure​weights​are​the​​company's​optimal​weights

Bonds 9% annually, 10 yr maturity, 8% YTM 12

Preffered stock- market price 4.72 6

Common 20

Total: 38

Questions:

What is the proportion of debt in the firm's capital structure?

0.31578947368421

What is the proportion of preferred stock in the firm's capital

structure?
0.157894736842105

What is the proportion of common equity in the firm's capital

structure?
0.526315789473684
What is the after-tax cost of debt for Universal Exports?
5.6
What is the cost of preferred stock for Universal Exports?
10.5932203389831

What is the cost of common equity for Universal Exports? Note that
the problem gives us the amount of the market risk premium, which
is equal to (km-kf):
11.15
What is the WACC for Universal Exports?
debt:
1.76842105263158
pref:
1.67261373773417
Common:
5.86842105263158

9.30945584299732
Bea​Kerr​is​an​analyst​in​the​​treasurer's​
office​at​MupetLabs​Inc.​Mr.​Kerr​needs​your​
help​to​estimate​the​market​value​weights​
for​​MupetLabs'​cost​of​capital.​MupetLabs​
has​​long-term​bonds​​outstanding,​preferred​
shares​outstanding,​and​common​shares.​
Selected​information​for​each​of​the​
securities​is​provided​in​the​table​below.

Long term preffered

10000000 1400000
FV outstanding

Coupon 6% FV $8/share
Annual Divident 9%
8 years Yield: 11%
YTM: 9%

a. What is the market value of long-term debt?

$8,339,554.27

b. What is the market value of preferred shares?

Price of preferred:

6.54545454545455
9163636.36363636

c. What are the capital structure weights for MupetLabs Inc.?

Common:
135200000

Total:
$152,703,190.63
Debt:
5.46%
Preferred:
6%
Common:
89%
 Bobs Balloons has 80,000 bonds outstanding that are
selling at par value. Bonds with similar characteristics
are yielding 8.5%. The company also has 4 million
shares of common stock outstanding. The stock has a
beta of 1.1 and sells for $40 a share. The U.S. Treasury
bill is yielding 4% and the market risk premium is 8%.
Jack's tax rate is 35%. What is Jack's weighted average
cost of capital?

common Debt:
5200000 80000*1000
outstanding 80
Equity:
market price $26 4000000*40
160
Total:
240

debt weight:

0.333333333333333
equity weight:

0.666666666666667

0.093 Debt:
5.525
Equity:
0.128
12.8

Debt:
1.84166666666667
Equity:
8.53333333333333
Total:
10.375
 0.0325
$0.02275
$0.07025

$2,027.90

$9,760.0000
$11,787.9000

$0.8280

$5.82
0.1720325780758
0.7225368279185
0.8945694059944

$6.54
The Garcia Corp purchased a $300,000 machine
which falls into Class 39 with a 25% depreciation rate.
The machine is used for four years and then sold for
$75,000. At the end of the fourth year, the
undepreciated capital cost is $110,742. The weighted
average cost of capital is 10%. The tax rate is 40%.
What is the present value of the tax shields
associated with the sale of the machine in four years?

10212
Project XY requires an investment of
$1,000 and generates annual revenues
of $600 and annual expenses of $300.
The CCA rate is 0.25. All cash flows
occur at year-end. The project will last
for 5 years when the machinery will be
useless. The firm’s tax rate is 36%. If
the firm’s cost of capital is 10%, what is
the project’s NPV?

1 2 3
Prjoect XY
Starting UCC 1000 875 656.25

CCA Rate 12.50% 25% 25%

Depreciation Expense 125 218.75 164.0625
Ending UCC 875 656.25 492.1875

Year 0 1 2 3

Revenues 600 600 600

Operating Costs 300 300 300
Depreciation 125 218.75 164.0625
EBIT 175 81.25 135.9375

Less: taxes 63 29.25 48.9375

NOPAT 112 52 87

Add: depreciation 125 218.75 164.0625

OCF 237 271 251

Initial Investment -1000

Change NWC
SV
PV:TS

Cash Flows -1000 237 271 251

Discount CF -1000 215.454545 223.966942 188.580015

NPV -26.8726854 NPV

 4 5

492.1875 369.140625

25% 25%
123.046875 92.2851563
369.140625 276.855474

4 5

600 600
300 300
123.046875 92.2851563
176.953125 207.714844

63.703125 74.7773438
 113 133

123.046875 92.2851563
236 225

0
71.2285714

236 296.228571
161.191175 183.934636
The machine had an expected life of three years at the time of purchase and an
estimated salvage value of $200 at the end of the three years. The machine was
depreciated at 25%. The division manager reports that a new felt press that
makes even smoother felt can be purchased for $12,000 (including installation).
The new felt press will expand sales from $10,000 to $15,000 a year because
the new fashion is for smoother felt. Further, it will reduce labour and raw
materials usage sufficiently to cut operating costs from $7,000 to $5,000. (Note
that incremental operating costs are negative.) The new machine has an
estimated salvage value of $2,000 at the end of two years. The new machine
requires an increase in felt inventory of $1,000. The old machine’s current
market value is $1,000. Taxes are 40%, and the firm’s cost of capital is 10%.
What are the incremental cash flows in years 1 and 2 of the replacement
project? (Complete the cash flow table.)

revenue 5000

operating costs -2000

depreciation 1375

EBIT 5625
Less: taxes 2250
Add: depreciation 3375

OCF 4750

These are negative because you are saving 2000/month

 What are the terminal year cash flows for the Rumpel
Felt replacement project (not including the operating
cash flows)? (The incremental UCC at the end of Year 2
is $7,218.75.)

5000 Net capital

-2000 Change in salvage

2406.25 PV incremental tax shield
Terminal incremental cash flow

4593.75
1837.5
2756.25

5162.5
 The Vogons are evaluating a new planet
demolition machine that costs $15 million.
The machine falls in Class 43 with a
depreciation rate of 30%. What is the
annual depreciation expense in the first
year? Express your answer in millions of
dollars rounded to two decimal places

Rate year 1:
0.15
1000 2250000

1800
1548.21429
4348.21429
Bobby Jones, the club pro at Pebble Beach Golf Club, is considering
replacing his fleet of golf carts. He bought the existing fleet of 100 EZ-GO
carts two years ago for $2,000 per cart. He is considering replacing them
with a new model Club Car. Each Club Car has a GPS, a cooler, and a
ball/club cleaner. Each Club Car costs $3,000. The carts are in Class 43
with a 30% depreciation rate. If he sold the EZ-GO carts today he could
get $750 for each cart. One advantage of buying the new carts is that
they are more durable and so Bobby can carry a smaller inventory of
spare parts. Bobby figures his inventory will drop by $25,000. If Bobby
goes ahead with the golf cart replacement, what are the initial cash
flows? Assume a tax rate of 35%

NEW price:

Salvage Old:

Save on Inventory :25000

Initial cash flows:

-200000
The Rumpel Felt Company purchased a felt press last year
at a cost of $15,000. The division manager reports that for
$14,000 (including installation), a new felt press can be
bought. Both machines are in Class 43 with a 30%
depreciation rate. The old machine's current market value
is $11,000. The new press will be used for two years and
then sold for $4,000. If the old press is not replaced, then
it could be sold for $3,000 in two years. What is the
present value of incremental tax shields in the terminal
year? The tax rate is 40% and Rumpel’s cost of capital is
10%

Year 2:
1785

PV:
235.5
Mike Mulligan Excavation Inc. has one Caterpillar
345DL Hydraulic Excavator. It was purchased at the
beginning of 20X4 for $400,000. The excavator is in
class 8 with a 20% depreciation rate. Selected
financial values for 20X5 are shown in the table.
Assume a corporate tax rate of 35%. How much tax
is owed in 20X5 if it is a regular year of
operations? Assume that the interest expense is
zero. Round to the nearest dollar.

Sales 3000000
COGS 1350000
SG&A 990000

660000

Depreciation:

72000

Taxes:

205800
Mike Mulligan Excavation Inc. has one
Caterpillar 345DL Hydraulic Excavator. It
was purchased at the beginning of 20X4
for $288,115. The excavator is in Class 43
with a 30% depreciation rate. Assume that
the corporate tax rate is 35% and that
Mike’s cost of capital is 10%. What is the
present value of tax shields (as of the
terminal year) if Mike sells the 345DL at
the end of 20X5 for $188,571?

43223.25
244891.75

73467.525
171424.225
-4501.0284375
Tinney & Smyth Inc. is considering the purchase of a
new batch polymer-bonding machine for producing
Crazy Rubber, a new children’s toy. The machine will
increase EBITDA by $215,000 per year for the next two
years. The machine’s purchase price is $360,000 and
the salvage value at the end of two years is $46,800.
The machine is classified as Class 8 with a depreciation
rate of 20%. What is the depreciation tax shield in the
second year of operations? Use a tax rate of 35%.
Round to the nearest dollar.

64800.00
dr*(1-dr/2)*UCC0
22680
Tinney & Smyth Inc. is considering the purchase of a new
batch polymer-bonding machine for producing Crazy
Rubber, a new children’s toy. The machine will increase
EBITDA by $209,769 per year for the next two years. The
machine’s purchase price is $260,000 and the salvage
value at the end of two years is $46,800. The machine is
in Class 43 with a depreciation rate of 30%. The
depreciation expense in Year 1 is $39,000. The tax rate is
35%. What are the operating cash flows for the project in
Year 1? (Include the depreciation tax shield.)

136349.85
13650
149999.85

Depreciation:
39000
13650
Bill Sharpe, owner of Sharper Knives Inc., is closing his
business at the end of the current fiscal year. His sole
asset, the knife-sharpening machine, is four years old.
The undepreciated capital cost of the machine is
$72,000. The machine is in class 8 with a 20%
depreciation rate. Bill has agreed to sell the machine
at the end of the year for $72,000. What is the
present value of tax shields associated with the sale
of the machine? The tax rate is 35% and Bill’s cost of
capital is 9%

0
Tinney & Smyth Inc. is considering the purchase of a new
batch polymer-bonding machine for producing Crazy
Rubber, a children’s toy. The machine will increase
EBITDA by $215,000 per year for the next two years. The
machine’s purchase price is $260,000 and the salvage
value at the end of two years is $46,800. To run the Crazy
Rubber production line the company will need to
purchase an inventory of polydimethylsiloxane and boric
acid for a total cost of $15,000. The tax rate is 35%. What
are the terminal year cash flows? (Assume that
depreciation is not tax deductible.) Round your answer to
the nearest dollar

OCF 2:
139750
201550
Ken Smith wants to start a deck and fence company.
To start the business, Ken plans to invest $80,000 in a
pick-up truck and tools. The truck and tools are in
Class 43 with a depreciation rate of 30%. Ken is
forecasting that he will build 90 decks in the first year
and 110 decks in years 2 and 3. He anticipates that
the average deck will be priced at $5,500. Ken
estimates that the cost of lumber for the typical deck
is $2,000. Ken estimates that rent, office expenses,
vehicle expenses, wages, and salaries will total
$351,400 per year. The corporate tax rate is 30%.
What are operating cash flows in the second year of
the business?

12000
68000

20400
47600
Depreciation : 47600

605000
220000
385000

351400
33600

23520
6120
29640
An increasingly popular trend in mountain biking is to
remove the chain and coast down the mountain. This has
reduced demand for crank sets, chains, and derailleurs. As
a result, Endo Mountain Bikes Inc. is shutting down its
bicycle propulsion plant. It purchased the plant 2 years ago
for $320,000. It can sell the plant today for $184,237.1. The
plant is in Class 43 with a depreciation rate of 30%. When
the plant is closed, Endo’s net working capital will decrease
by $50,000. EBITDA in the final year is $270,000. Endo’s tax
rate is 35% and its cost of capital is 8%. What are the
terminal year cash flows? Round to the nearest dollar
Old Tom Morrison Golf Inc. is evaluating a new
product: high compression golf balls. The ball is
tentatively called the ‘Guttie’. The production line for
the Guttie would be set up in an unused section of
Morrison’s main plant. The machinery will cost
$240,000. Morrison’s inventories would have to be
increased by $25,000 to handle the new line. The
machinery is in Class 43 with a depreciation rate of
30%. The project is expected to last 2 years with
estimated EBITDA of $180,000 in each year. The
machinery has an expected salvage value of $25,000 at
the end of two years. Robertson’s tax rate is 30% and
its weighted average cost of capital is 10%. Answer the
following questions to compute the NPV of the Guttie
project

a. What are the initial cash flows? Round to the

nearest dollar
-265000

What are the operating cash flows in Year 1

(ignoring depreciation)? Round to the nearest
dollar
126000

c. What is the sum of the net working capital and

salvage cash flows in the terminal year? (In other
words, terminal cash flows not including operating
cash flows, depreciation tax shields, and the PV of tax
shields.) Round to the nearest dollar
50000

d. What is the adjusting cash flow in Year 2 for the

depreciation tax shield? Round to the nearest dollar

Taxes * depreciation

Depreciation:
61200
Tax sgield:
 18360

e. What is the present value of tax shields in the

terminal year? Round to the nearest dollar

Calculate Ending UCC: 240000 204000

PV: 0.15 0.3
26505 36000 61200
204000 142800

What is the NPV of the project? Round to

the nearest dollar

180000 180000
Less; Taxes: 54000 54000
126000 126000
162000 187200

147272.727 154710.744

61983.4711
Dr. Hunter Thompson is considering opening an MRI clinic in Aspen. The
business will operate for three years. The MRI machine, a GE, costs $2.6M and
will be delivered immediately. The machine is in Class 43 with a depreciation
rate of 30%. The machine can be sold for $500,000 at the end of the three years.
Dr. Thompson estimates that he can perform 2,500 scans annually at $700 per
scan for $1.75M of annual revenues. Dr. Thompson will lease office space in a
local strip-mall and estimates that annual operating expenses will be $550,000
(including rent, salaries, and wages). Dr. Thompson plans to offer credit to his
customers. He expects to have about 45 days of sales in accounts receivable, or
about $300,000. He has arranged venture funding from Oscar Acosta who
expects a return of 10% on his invested capital. The tax rate is 35%. Answer the
following questions to determine if the project is worth undertaking.

What are the initial cash flows? Round to the nearest dollar.
-2900000

What are the operating cash flows in Year 1? (Round to the nearest dollar.)
780000

What are the terminal cash flows?

1580000

d. NPV
-2900000
 1 2 3
2600000 2210000 1547000
0.15 0.3 464100

390000 663000 464100

2210000 1547000 1082900

1750000 1750000 1750000

550000 550000 550000
 1200000 1200000 1200000

780000 780000 780000

500000
300000
1580000

709090.909090909 644628.099174 1187077.39

-359203.606311045
POM Bakery is considering replacement of a custard injecting
machine with a new high-speed injector, which can fill twice as many
cakes per hour as the old machine. The existing injection machine
was purchased 2 years ago for $4M. It could be sold today for $2M
and its expected salvage value in three years is $0.5M. The injectors
are in Class 43 with a 30% depreciation rate. The new custard
injector costs $4M. The new machine will be sold for $1.5M at the
end of 3 years. The new machine will increase EBITDA by $700,000
per year. The company’s tax rate is 40% and its cost of capital is 12%.
What are the annual operating cash flows in the first year after
replacement? (Round your answer to the nearest dollar.)

138468613

138468613
0.186
You have been hired as a financial analyst to do a
feasibility study of a new video game for Passivision.
Marketing research suggests that there is a 50%
probability that Passivision can sell 24,000 units per year
at $62.50 net cash flow (after tax) per unit for the next 10
years. And 50% probability of just selling 10,000 units.
The relevant discount rate is 10%.
The required initial investment is $7 million.
Calculate the expected NPV?

24,000

-7000000

1500000
$9,216,850.66

$4,608,425.33
 1 2 3 4 5 6
1500000 1500000 1500000 1500000 1500000 1500000

1363636.36363636 1239669.42 1126972.2 1024520.18 931381.985 846710.895

2216850.65855702

DO THE SAME W 10000

THEN DO NPV 1*.5 + NPV*.5
$3,840,354.44

$1,920,177.22

$6,528,602.55
($471,397.45)

2500000
 7 8 9 10
1500000 1500000 1500000 1500000

769737.177 699761.07 636146.428 578314.934

Calculat operating cash flow for W enterprise,assume depreciation
is tax deductible

sales 100000
cogs 76176
SG&A 11181

Depreciation 1502
EBIT 11141
Interest 247

Income before taxes 10893

Taxes 3376
Net income 7517

Taxes:
0.309923804277977
OCF
12643
8724.63334251354

465.505554025521
9190.13889653906
Calculate Using chart What is free
operating below what
cash flow, is the
assumedepr change in
eciation is net working
NOT tax capital
deductibele

revenue 100000 ACC pay 20,000 Item

cogs 64798 Acc liabilities 5000 Ebita
sg&a 16202 depreciation 10000 depreciation

depreciation 4739 Inventories 30000 tax rate

EBIT 14260 current asset
Interest expe 7230 5000 current liabili

Incdome befo 7030 Capex

taxes 2108
net income 4922 Formula:

OCF-NWC-Capex
Taxes: OCF:
0.29985775 240971
0.70014225 166269.99
8875.92
18999 175145.91
13302.0026

184851.91
 year 0 year 1

240971
28632

0.31
465655 373988
413193 381299

50067

CF-NWC-Capex
NWC:
-91667
-31894
-59773
Ken Smith wants to start a deck and fence company. To
start the business, Ken plans to invest $70,000 in pick-
up trucks and tools. Ken is forecasting that he will
build 100 decks in the first year and 120 decks in years
2 and 3. He anticipates that the average deck will be
priced at $6,000. Ken estimates that the cost of lumber
for the typical deck is $2,000. Ken estimates that rent,
office expenses, vehicle expenses, wages and salaries
will total $350,000 per year. The corporate tax rate is
30%. What are operating cash flows in the first year?
(Assume that depreciation is not tax deductible.)
Round your answers to the nearest dollar

600000
200000
400000

350000
50000

35000
Ken Smith wants to start a deck and fence company. To start the
business, Ken plans to invest $70,000 in pick-up trucks and tools.
Ken is forecasting that he will build 100 decks in the first year and
120 decks in years 2 and 3. He anticipates that the average deck
will be priced at $5,500. Ken estimates that the cost of lumber for
the typical deck is $2,000. Rent, office expenses, vehicle
expenses, wages and salaries will total $351,400 per year. Ken
plans to carry an inventory of lumber of $25,000. At the end of
three years, Ken thinks that he can sell the trucks for $10,000, but
the tools will be worthless. The corporate tax rate is 30%. What
are the terminal year cash flows?

Year 3:
660000
240000

351400
68600
48020

83020
Old Tom Morrison Golf Inc. is evaluating a new product: high
compression golf balls. The ball is tentatively called the
"Guttie." The production line for the Guttie would be set up
in an unused section of Morrison’s main plant. The
machinery will cost $240,000. Morrison’s inventories would
have to be increased by $30,000 to handle the new line. The
project is expected to last 2 years with estimated EBITDA of
$200,000 in each year. The machinery has an expected
salvage value of $40,000 at the end of two years. Robertson’s
tax rate is 30%. What are operating cash flows in the first
year? (Assume that depreciation is not tax deductible.)
Round your answers to the nearest dollar

140000
Old Tom Morrison Golf Inc. is evaluating a new
product: high compression golf balls. The ball is
tentatively called the "Guttie." The production line
for the Guttie would be set up in an unused
section of Morrison’s main plant. The machinery
will cost $240,000. Morrison’s inventories would
have to be increased by $30,000 to handle the
new line. The project is expected to last 2 years
with estimated EBITDA of $220,000 in each year.
The machinery has an expected salvage value of
$40,000 at the end of two years. Robertson’s tax
rate is 30%. What are the terminal year cash
flows? (Assume that depreciation is not tax
deductible.) Round your answers to the nearest
dollar

Year 3:
154000
224000
Sleep Comfort Corp. is considering a new product: the
Ejector Bed. The Ejector Bed allows either person (left
or right) to eject the other person off of the bed at the
touch of a button. The production equipment and
facilities will cost $500 million. The project will last two
years by which time the equipment and facilities will be
sold for $150 million. Earnings before interest, taxes,
and depreciation are forecast to be $400 million in both
years. The project will require an increase in net
working capital of $25 million, which will be liquidated
at the end of year two. The company's cost of capital is
9% and the marginal tax rate is 35%. Answer the
following questions

What are the initial cash flows?

-525

What are the operating cash flows in Year 1?

260

What are the terminal cash flows?

435

What is NPV?
238.532110091743
366.130797070954
-525
79.6629071626967
Mike Mulligan Excavation Inc. is considering the purchase of a
new Caterpillar 345DL Hydraulic Excavator. The machine will be
used for two years to excavate building foundations. The cost
of the machine is $350,000 and it can be sold for $100,000 at
the end of two years. Mike estimates that, with the new
machine, he can dig 35 foundations per year with an average
invoice price of $12,000. Mike estimates that his incremental
costs will be $150,000 per year (for wages, fuel &
maintenance). The company's cost of capital is 9% and the
marginal tax rate is 35%. What are the operating cash flows in
Year 1? Assume that the cost of buying the new excavator is
tax deductible at the end of the first year. (Round to the
nearest dollar.)

420000
150000
270000

-28000
298000
Tinney & Smyth Inc. is considering the purchase of a new
batch polymer-bonding machine for producing Crazy
Rubber, a children’s toy. The machine will increase EBITDA
by $215,000 per year for the next two years. The machine’s
purchase price is $260,000 and the salvage value at the
end of two years is $46,800. To run the Crazy Rubber
production line, the company will need to purchase an
inventory of polydimethylsiloxane and boric acid for a total
cost of $15,000. The tax rate is 35%. What are the
operating cash flows in Year 1? Assume that the cost of
buying the new machine is tax deductible at the end of
the first year. (Round to the nearest dollar.)

-15750
230750
The Rumpel Company purchased a felt press last year at a cost of
$7,500. The machine has worn out quickly and is slowing
production. It could be sold today for $4,000. The division
manager reports that, for $12,000 (including installation), a new
felt press can be bought. Two years after replacement the old
press can be sold for $200 and the new press will be worth $2,000.
The new press will increase EBITDA by $7,000, but, to sustain the
higher rate of production, the company will need additional felt
inventory of $3,000. Taxes are 40%. Assume that depreciation is
not tax deductible. What are the initial cash flows for the
replacement? (Answer in dollars and round to the nearest dollar.)
Assume that depreciation is not tax deductible. The tax rate is
40%.

What are the initial cash flows for the replacement?

-11000

What are incremental operating cash flows in the first year

after the replacement?
4200

What are the terminal year cash flows?

4200
2000

3000
-200
9000
POM Bakery is considering replacement of a custard injecting
machine with a new high-speed injector, which can fill twice as
many cakes per hour as the old machine. The existing injection
machine was purchased 2 years ago for $400,000. It could be
sold today for $190,000 and its expected salvage value in two
years is $45,000. The new custard injector costs $345,000. The
new machine will be sold for $145,000 at the end of 2 years.
The new machine will increase EBITDA by $75,000 per year
but it also requires $10,000 extra inventory of milk, butter,
eggs and sugar. Assume that depreciation is not tax
deductible. The tax rate is 40%. Use this information to answer
the following questions.

What are the initial cash flows for the replacement?

-165000

What are incremental operating cash flows in the first year

after the replacement?
45000

What are the terminal year cash flows?

45000
145000

10000
-45000
155000
The Select Comfort Company purchased a mattress-stuffing
machine 5 years ago for $70,000. When purchased it had an
estimated salvage value of $5,000 at the end of seven years.
Last year, the mattress machine was overhauled at a cost of
$3,000. The old machine can be sold today for $20,000. A new
machine can be purchased for $69,300. It has a 2-year life and
is expected to reduce operating expenses by $50,000 per year.
After 2 years, the new machine can be sold for $20,000. The
company’s cost of capital is 9% and the tax rate is 35%.
Assume that depreciation is not tax deductible.

What are the initial cash flows?

-49300

What are the operating cash flows at the end of the first year?
32500

What are the terminal year cash flows?

32500
20000

-5000
47500

29816.5137614679
39979.7996801616
69796.3134416295
20496.3134416295
Panametric Automotive produces dingle arms for
automatic transmissions. It has historically stamped the
arms but is now considering a new automated milling
machine called the Turbo Encabulator. The stamping press
was purchased 3 years ago for $4 million. It could be sold
today for $2 million and its expected salvage value at the
end of its life in 2 years is $0.5M. The Turbo Encabulator
costs $3 million and could be sold for $1.5 million at the
end of 2 years. The Turbo Encabulator can produce more
dingle arms, so EBITDA will increase by $800,000. The
new machine requires that Panametric hold $250,000
more spare parts inventory. Assume that depreciation is
not tax deductible. The tax rate is 40%

What are the initial cash flows for the replacement?

-1250000

What are incremental operating cash flows in the first

year after the replacement?

480000

What are the terminal year cash flows?

480000
250000

1500000
-500000
1730000
Huck Long is the VP of production at Discraft Inc., manufacturer
of freestyle, golf, and ultimate discs. The R&D team has
designed a new 174gram driver for disc golf. The driver is both
more stable and longer. The secret to the disc is a new polymer.
To mix the new polymer in large batches, Discraft needs a new
mixer/agitator. Huck is considering two alternatives: Mixer A
and Mixer B. Mixer A is expected to have a four year life and
Huck estimates that its NPV is $50,000. Mixer B is expected to
have a five year life and Huck estimates that its NPV is $60,000.
Discraft’s cost of capital is 10%. Use the equivalent annual
annuity technique to compare the two alternatives. What is the
annual annuity amount of each, and which should Huck
choose?

Mixer a:
PVIF:
$0.68

$3.17
Bob Cratchit, a new analyst at Scrooge & Marley Inc., has prepared a
capital budget for the Tiny Tim project. He is scheduled to present his
analysis at a board meeting in one hour. Bob just received an email from
his boss, Fred Fezziwig, indicating that the capital budget is missing a
critical piece of machinery with a capital cost of $150,000. The machine
would be purchased at the outset of the project (Year 0). The machinery
is in Class 8 with a depreciation rate of 20%. The machine will be sold for
$100,000 at the end of the two-year project. The tax rate is 35% and the
weighted average cost of capital is 9%. No other element of the capital
budget would be affected. Assume that all cash flows occur at year-end
(except for the purchase of equipment). What is the reduction in NPV
associated with the inclusion of the missing machinery?

150000 135000
0.1 0.2
15000 27000

135000 108000

1931.03448275862

TAX SHEILD YEAR 1:

5250

TAX SHIELD YEAR 2:

9450
Year 1 Year 2
5250 9450

1931.03448
100000
5250 111381.034

4816.51376 93747.1884
98563.7021
-51436.2979
Sleep Comfort Corp. is considering a new product: the
Ejector Bed. The Ejector Bed allows either person (left or
right) to eject the other person off of the bed at the
touch of a button. The production equipment and
facilities will cost $550 million. The production
equipment is in Class 43 with a depreciation rate of 30%.
The project will last two years by which time the
equipment and facilities will be sold for $150 million.
Earnings before interest, taxes, and depreciation is
forecast to be $417.1million in both years. The marginal
tax rate is 35%. What is the operating cash flow in the
first year

550000000
82500000

271115000
28875000
299990000
Concussion Skateboards Inc. has designed a new
board with a carbon-fiber deck and titanium trucks.
The initial cash (out) flows for the plant and
equipment are $12 million. The plant and equipment
are in class 8 with a depreciation rate of 20%.
Concussion expects annual sales of $30 million for
the next 2 years. EBITDA is expected to be $9 million
per year. The company’s tax rate is 30%. What are
the operating cash flows in the first year of the
project?

1.2
0.36
6.3

6.66
Endo Mountain Bikes Inc. is building a new
manufacturing facility. The plant and equipment cost
$10 million and are in Class 43 with a 30%
depreciation rate. Endo expects annual sales of
$25.8393 million for the next 2 years. COGS and
SG&A are expected to be 60% of sales. The tax rate is
30%. What are operating cash flows in the second
year (including the depreciation tax shield)?

depreciation:
1500000
8500000

2550000

Ebita:
15.50358

10.33572

7.235004
0.765
8.000004
Tinney & Smyth Inc. is considering the purchase of a new batch polymer-
bonding machine for producing Crazy Rubber, a children’s toy. The machine
will increase EBITDA by $214,940 per year for the next two years. The
machine’s purchase price is $260,000 and the salvage value at the end of
two years is $70,000. The machine is in Class 43 with a 30% depreciation
rate. To run the Crazy Rubber production line, the company will need to
purchase an inventory of polydimethylsiloxane and boric acid for a total cost
of $15,000. The operating cash flows in Year 2 are $178,418 and the present
value of tax shields is $16,582. The tax rate is 25% and T&S’s cost of capital
is 11%. What are the terminal year cash flows for the project in Year 2

161205
221000
39000

66300
16575

177780

279362
Mike Mulligan is winding up his excavation business and retiring. He is
selling his steam shovel, which he affectionately calls Mary Anne, for
$177,622.4. He bought Mary Anne new for $300,000 four years ago
(Class 8 with a 20% depreciation rate) and her undepreciated capital
cost is $138,240 today. When Mike sells Mary Anne, he will also sell his
spare-parts inventory for $10,000. Mike’s business is in a 30% tax
bracket and his cost of capital is 11%. What are the terminal year cash
flows for Mike Mulligan (ignoring operating cash flows and the
depreciation tax shield)?

-7622.4
180000