Mathew Dominic T.
Jose
BSBAFM2-1
A. Calculate each project’s payback period. For Project N
for project M (Annuity) Year 1 = 11,000 -> 1yr
Payback period = 28,500 ÷ 10,000 Year 2 = 10,000 -> 1yr
Payback period = 2.85 yrs Year 3 = 6,000 -> 0.67 yrs
9,000 2.67 yrs
Payback period = 2.67 yrs
B. Calculate the NPV for each project
for Project M = $10,000 x 2.914 - 28,500
Project M = 29,140 - 28,500
NVP = $ 640
For Project N PVIF PV=CF, x PVIF PV = 28,148
Year 1 = 11,000 0.877 x 9,647 Less: Project N
Year 2 = 10,000 0.769 x 7,690 Initial Investment = 27,000
Year 3 = 9,000 0.675 x 6,075 NPV = $1,148
Year 4 = 8,000 0.592 x 4,736
PV = $28,148
C. Calculate the internal rate of return (IRR) for each project. For Project M (Annuity)
For Project M (Annuity)
Discount Rate NPV (M) NPV (N)
0 0
5 6,960 6,903
10 3,199 3,490
15 50 618
16 -518 9
[
PV = Ax 1−
1
(1+k )]/K
Where PV is equal to initial investment of M (28,500) Initial Investment of
N (27,000)
28,500=10,000 1−
[ 1
(1+ k)]
n
/K 28,500=10,000 1−
[ 1
(1+ k)]
n
/K
(Project M) IRR= 0.15086 or 15.086 %
(Project N) IRR= 0.161935 or
16.194%
D. Summarize the preferences dictated by each measure you calculated and indicate which project you
would recommend. Explain why.
M N
Payback Period 2.85 yrs 2.65yrs
NVP $640 $1148
IRR 15.086% 16,194%
In terms of Payback Period Project N has lesser Payback [Link] Present Value both is greater than
zero but project N is larger. IRR Accept Project N because greater than cost of capital Therefore, Project
N has a greater Return of Investment in shorter time than Project M.
GIVEN:
New Equipment: Old Equipment
Initial Cost = 75,000 Purchased 4yrs ago
Installation Cost = 5,000 Installation Cost = 50,000
Depreciated under MACRS 5 years recovery
5 years recovery period Salvage Value = 55,000
Investment in Working Capital = 15,000
Tax Rate= 40%
A. Calculate the book value of the old piece of equipment.
Book Value of old equipment using MARCS
= 50,00 x (0.20 + 0.32 + 0.19 + 0.12)
=$50,000 x 0.83 = $41,500
Book value = 50,000 -$ 41,500 = $8,500
B. Determine the taxes, if any, attributable to the sale of the old equipment
= $55,000 - $8,500 = $46,500
Taxes = 0.40 x $46,500 = $18,600
Taxes == $18,600
c. Find the initial investment associated with the proposed equipment replacement.
Installed cost of proposed machine
Cost of new machine
$75,000
+Installation Cost 5,000
Total Installed cost-proposed 80,000
Depreciable value
After-tax proceeds from sale of present machine
Proceeds from sale of present machine $55,000
Tax on sale of present machine 18,600
-Total after-tax proceeds- present $ 36,400
Change in net working capital 15,000
Initial Investment 15,600
Problem 3:
A machine currently in use was originally purchased 2 years ago for $40,000. The
machine is
being depreciated under MACRS using a 5-year recovery period; it has 3 years of
usable life
remaining. The current machine can be sold today to net $42,000 after removal and
cleanup
costs. A new machine, using a 3-year MACRS recovery period, can be purchased at a
price of
$140,000. It requires $10,000 to install and has a 3-year usable life. If the new
machine is
acquired, the investment in accounts receivable will be expected to rise by
$10,000, the
inventory investment will increase by $25,000, and accounts payable will increase by
$15,000.
Earnings before depreciation, interest, and taxes are expected to be $70,000 for each of the
next
3 years with the old machine and to be $120,000 in the first year and $130,000 in the second
and
third years with the new machine. At the end of 3 years, the market value of the old machine
will
equal zero, but the new machine could be sold to net $35,000 before taxes. The firm is
subject to
a 40% tax rate.
A. Determine the initial investment associated with the proposed replacement
[Link] cost of proposed machineCost of new machine$140,000+Installation
Cost10,000Total Installed cost-proposed150,000Depreciable valueAfter-tax proceeds
from sale of present machineProceeds from sale of present machine$42,000Tax on sale
of present machine9.120-Total after-tax proceeds- present32,880Change in networking
capital20,000Initial Investment$137,120
B. zCalculate the incremental operating cash inflows for years 1 to 4 associated with the
proposedreplacement. (Note: Only depreciation cash flows must be considered in year
4.
C. Calculate the terminal cash flow associated with the proposed replacementdecision.
(Note:This is at the end of year 3.)
D. Depict on a time line the relevant cash flows found in parts a, b, and c that are
associated withthe proposed replacement decision, assuming that it is terminated at the
end of year 3.$44,400 Terminal cash flow43,080Operating cash
flow$46,760$61,08087,480Total cash flow
d. Depict on a time line the relevant cash flows found in parts a, b, and c that are associated with
the proposed replacement decision, assuming that it is terminated at the end of year 3.
$44,400 Terminal cash flow
43,080
Operating cash flow
$46,760
$61,080
87,480
Total cash flow
1
2
$137,120
Problem 4:
TOR most recently sold 100,000 units at $7.50 each; its variable operating costs are $3.00 per
unit, and its fixed operating costs are $250,000. Annual interest charges total $80,000, and the
firm has 8,000 shares of $5 (annual dividend) preferred stock outstanding. It currently has 20,000
shares of common stock outstanding. Assume that the firm is subject to a 40% tax rate.
Given:
Sales = 100,000 units
8,000 shares of 5 (dividend)
P=7.50 per unit
20,000 shares- common stock
VC= 3.00 per unit
40% tax rate
FC=250,000
Annul Interest = 80,000
A. At what level of sales (in units) would the firm break even on operations (that is, EBIT $0)?
EBIT = 0FCEBIT = Q x (P - VC) - FC or Q =P−VC250,000Q =7.50−3Q = 55, 555, 56 =55,556 units
B. Calculate the firm's earnings per share (EPS) in tabular form at (1) the current level of salesand
(2) a 120,000-unit sales level.Particulars100,000 units120,000 unitsNo.
units100,000120,000Selling price per unit$7.50$7.50Variable operating costs per
unit$3.0$3.00Contribution per unit$4.50$4.50Total Contribution$450,000$540,000Fixed
operating
cost$450,000$250,000EBIT$200,000$290,000Interest$80,000$80,000EBT$120,000$210,000Tax
40% tax rate$48,000$84,000Net Income before Preferred Dividend$72,000$126,000Preferred
Dividend (8,000*$5)$40,000$40,000Net Income attributed to common stock$32,000$86,000No.
of shares20,00020,000EPS$1.60$4.30 EPS=EAC
C. c. Using the current $750,000 level of sales as a base, calculate the firm's
degree of operating leverage (DOL). At original Sales EBIT = Q(P-VC)FC EBIT
= Q(P-VC)FC 1 2 EBIT = 100,000(7.5-3) - 250,000 EBIT = 750,000(7.5-3) -
250,000 1 2 EBIT 200,000 EBIT =3,125,000 1 = 2 At 750,000 Sales
EBIT
−
EBIT
2
1
Percent change in EBIT=
Percent change in Sales = EBIT 1 750,000 − 100,000 100,000 3,125,000 − 200,000
Percent change in EBIT= Percent change in Sales = 6.5200,000
Percent change in EBIT= 14.625 % change ∈ EBIT 14.625
DOL = 2.25 % chang ∈ Sales6.5
D.
