Provide Financial & Business Performance Information - Solutions
Chapter 11:
Capital Budgeting
Solutions to Chapter Review Questions
1.
(a)
If projects are mutually exclusive then selection of one automatically
results in rejection of the other investment proposals.
When projects are independent then each is evaluated on its own merits.
(b)
(i) N.P.V. is the difference between the present value of cash inflows
(usually regarded as having +Ve sign) and present value of cash outflows
(usually regarded as having -Ve sign). N.P.V. may be +Ve, 0, or -Ve.
A positive N.P.V. indicates acceptability of the project.
(ii)
I.R.R. is the actual rate of return on an investment, i.e. the
discount rate which results in a Net Present Value of nil.
(iii)
N.P.V. , as it uses current and objective discount rate which can be
corroborated with reference to the current market in a given
locality.
2.
( a ) Accounting Rate of return =
Av profit after tax
Investment cost
= $15,000
50,000
( b ) Payback period year
Cumulative NCI
Payback Period
= 30%
1
2
25,000 50,000
2 years
( c ) Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 50,000 ENT, 25,000 ENT, 25,000 ENT, 25,000 ENT, 25,000 ENT, 25,000 ENT
2nd F CFI, i 0 COMP
Answer:
41.04% ( I.R.R. )
on/C
(d)
2nd F CFI, i 10 ENT  COMP
Answer:
$33,803.88 ( N.P.V. )
74
Provide Financial & Business Performance Information - Solutions
3.
Payback Period
Year l
2
3
4
5
(a)
20,000
120,000
Cash Flow
40,000
60,000
80,000
100,000
120,000
Cum Cash Flow
40,000
100,000
180,000
280,000
=
16.67% x 12 months = 2.0 months
=
4 years 2 Months
( b ) Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 300,000 ENT, 40,000 ENT, 60,000 ENT, 80,000 ENT, 100,000 ENT, 120,000 ENT
2nd F CFI, i 0 COMP
Answer:
8.76% ( I.R.R. )
on/C
If interest rate were 8% then
2nd F CFI, i 8 ENT  COMP
Answer:
$7,157 ( N.P.V. )
4.
Payback Period
Year l
2
3
4
5
(a)
10,000
20,000
Cash Flow
60,000
50,000
40,000
30,000
20,000
Cum Cash Flow
60,000
110,000
150,000
180,000
=
0.5% x 12 months = 6.0 months
=
4 years 6 Months
( b ) Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 190,000 ENT, 60,000 ENT, 50,000 ENT, 40,000 ENT, 30,000 ENT, 20,000 ENT
2nd F CFI, i 0 COMP
Answer:
2.09% ( I.R.R. )
on/C
If interest rate were 10% then
2nd F CFI, i 10 ENT  COMP
Answer:
- 31,171 ( N.P.V. )
75
Provide Financial & Business Performance Information - Solutions
5.
(a)(i)
Machine A
120,000
40,000
YEARS
Machine B
200,000
50,000
3
Machine C
270,000
60,000
4
4.5
Machine A
( ii ) Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 120,000 ENT, 40,000 ENT, 40,000 ENT, 40,000 ENT, 40,000 ENT, 40,000 ENT
2nd F CFI, i 0 COMP
Answer:
19.86% ( I.R.R. )
on/C
( iii )
2nd F CFI, i 9 ENT  COMP
Answer:
$35,586 ( N.P.V. )
Machine B
( ii ) Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 200,000 ENT, 50,000 ENT, 50,000 ENT, 50,000 ENT, 50,000 ENT
50,000 ENT, 50,000 ENT, 50,000 ENT, 50,000 ENT
2nd F CFI, i 0 COMP
Answer:
18.62% ( I.R.R. )
on/C
( iii )
2nd F CFI, i 9 ENT  COMP
Answer:
$76,741 ( N.P.V. )
Machine C
( ii ) Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 270,000 ENT, 60,000 ENT, 60,000 ENT, 60,000 ENT, 60,000 ENT, 60,000 ENT
60,000 ENT, 60,000 ENT, 60,000 ENT, 60,000 ENT, 60,000 ENT
2nd F CFI, i 0 COMP
Answer:
17.96% ( I.R.R. )
on/C
( iii )
2nd F CFI, i 9 ENT  COMP
Answer:
$115,059 ( N.P.V. )
(b)
Machine
Payback
IRR
NPV
A
1
1
3
B
2
2
2
76
C
3
3
1
Provide Financial & Business Performance Information - Solutions
6.
(a)
Project X
( ii ) Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 350,000 ENT, 120,000 ENT, 190,000 ENT, 75,000 ENT, 55,000 ENT, 35,000 ENT
2nd F CFI, i 0 COMP
Answer: 14.42% ( I.R.R. )
on/C ( iii )
2nd F CFI, i 10 ENT  COMP
Answer: $31,762 ( N.P.V. )
Project Y
( ii ) Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 350,000 ENT, 54,000 ENT, 162,000 ENT, 86,000 ENT, 102,000 ENT, 120,000 ENT
2nd F CFI, i 0 COMP
Answer: 14.31% ( I.R.R. )
on/C ( iii )
2nd F CFI, i 10 ENT  COMP
Answer:
$41,766 ( N.P.V. )
(b)
- 285,560 ENT, 40,000 ENT, 40,000 ENT, 40,000 ENT, 40,000 ENT, 40,000 ENT
40,000 ENT, 40,000 ENT, 40,000 ENT, 40,000 ENT, 40,000 ENT, 40,000 ENT
2nd F CFI, i 0 COMP
Answer:
8.00% ( I.R.R. )
7.
(a)
Project A
- 120,000 ENT, 70,000 ENT, 40,000 ENT, 30,000 ENT, 10,000 ENT, 10,000 ENT
2nd F CFI, i 0 COMP
Answer: 15.78% ( I.R.R. )
on/C ( b )
2nd F CFI, i 12 ENT  COMP
Answer: $ 7,771 ( N.P.V. )
Project B
( ii ) Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 120,000 ENT, 10,000 ENT, 20,000 ENT, 30,000 ENT, 50,000 ENT, 80,000 ENT
2nd F CFI, i 0 COMP
Answer: 12.84% ( I.R.R. )
on/C ( b )
2nd F CFI, i 12 ENT  COMP
Answer: $3,396 ( N.P.V. )
77
Provide Financial & Business Performance Information - Solutions
8.
(a)
Project AA
- 230,000 ENT, 30,000 ENT, 80,000 ENT, 100,000 ENT, 90,000 ENT, 80,000 ENT
2nd F CFI, i 0 COMP
Answer: 17.17% ( I.R.R. )
on/C ( b )
2nd F CFI, i 10 ENT  COMP
Answer: $49,665 ( N.P.V. )
Project BB
- 450,000 ENT, 120,000 ENT, 170,000 ENT, 110,000 ENT, 150,000 ENT, 60,000 ENT
2nd F CFI, i 0 COMP
Answer: 12.03% ( I.R.R. )
on/C ( b )
2nd F CFI, i 10 ENT  COMP
Answer: $21,939 ( N.P.V. )
Project CC
- 300,000 ENT, 95,000 ENT, 95,000 ENT, 95,000 ENT, 95,000 ENT, 95,000 ENT
2nd F CFI, i 0 COMP
Answer: 17.57% ( I.R.R. )
on/C ( b )
2nd F CFI, i 10 ENT  COMP
Answer: $60,125 ( N.P.V. )
Project DD
- 230,000 ENT, 90,000 ENT, 90,000 ENT, 90,000 ENT, 90,000 ENT, 90,000 ENT
2nd F CFI, i 0 COMP
Answer: 27.53% ( I.R.R. )
on/C ( b )
2nd F CFI, i 10 ENT  COMP
Answer: $111,171 ( N.P.V. )
RANKING PROPOSALS
ON NPV
$
ON IRR
%
1
DD
111,171
1
DD
27.53
2
CC
60,125
2
CC
17.57
3
AA
49,665
3
AA
17.17
4
BB
21,939
4
BB
12.03
Rich limited should only invest in DD and CC, as these have positive NPV
and a rate of return in excess of the required 14%
78
Provide Financial & Business Performance Information - Solutions
9.
(a)
Project A
- 200,000 ENT, 41,000 ENT, 41,000 ENT, 41,000 ENT, 41,000 ENT, 41,000 ENT
41,000 ENT, 41,000 ENT, 41,000 ENT, 41,000 ENT, 41,000 ENT
2nd F CFI, i 0 COMP
Answer: 15.75% ( I.R.R. )
on/C ( b )
2nd F CFI, i 10 ENT  COMP
Answer: $51,927 ( N.P.V. )
Project B
- 200,000 ENT, 140,000 ENT, 100,000 ENT, 30,000 ENT, 20,000
2nd F CFI, i 0 COMP
Answer: 24.82% ( I.R.R. )
on/C ( b )
2nd F CFI, i 10 ENT  COMP
Answer: $46,117 ( N.P.V. )
Project C
- 400,000 ENT, 89,000 ENT, 89,000 ENT, 89,000 ENT, 89,000 ENT, 89,000 ENT
89,000 ENT, 89,000 ENT, 89,000 ENT, 89,000 ENT, 89,000 ENT
2nd F CFI, i 0 COMP
Answer: 18.00% ( I.R.R. )
on/C ( b )
2nd F CFI, i 10 ENT  COMP
Answer: $146,866 ( N.P.V. )
Project D
- 200,000 ENT, 55,480 ENT, 55,480 ENT, 55,480 ENT, 55,480 ENT, 55,480 ENT
2nd F CFI, i 0 COMP
Answer: 12.00% ( I.R.R. )
on/C ( b )
2nd F CFI, i 10 ENT  COMP
Answer: $10,313 ( N.P.V. )
( a ) & ( b)
1
2
3
4
RANKING PROPOSALS
ON IRR
B
24.82%
1
C
18.00%
2
A
15.75%
3
D
12.00%
4
ON NPV
C
146,866
A
51,927
B
46,117
D
10,313
(c)
Projects C & A
(d)
Projects B & C
(e)
The question arises of the return on reinvested funds at the end of year 4.
Will a reinvestment proposal return 24.84% or at least better than or equal
to the next best ranking project, at this point C at 18%
79
Provide Financial & Business Performance Information - Solutions
10.
Projects X, Y and Z have Net Present Values of $100,000, $200,000 and $300,000
respectively.
If the company's decision is to be mutually exclusive, which projects or project
should be selected?
( b ) The highest NPV
11.
The Net Present Value of Project ABC as $400,000 (positive). The weighted
average cost of capital is 7% p.a. Which of the following calculations could be
correct to calculate the Internal Rate of Return?
( c ) Greater than 7%.
12.
( a ) Accounting Rate of return =
( b ) Total Cash Flow
Year 1
Year 2
Year 3
Av profit after tax = 3,000,000 =
Investment cost
6,000,000
Net Profit
2,000,000
3,000,000
4,000,000
( c ) Payback period year
Cumulative NCI
Payback Period
Depreciation
+ 2,000,000 =
+ 2,000,000 =
+ 2,000,000 =
1
4,000,000
50%
Cash Flow
4,000,000
5,000,000
6,000,000
15,000,000
2
2,000,000
1 years + (2,000,000/ 5,000,000)
1 years 4.8 months
( d ) Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 6,000,000 ENT, 4,000,000 ENT, 5,000,000 ENT, 6,000,000
2nd F CFI, i 0 COMP
Answer:
58.80% ( I.R.R. )
on/C
(e)
2nd F CFI, i 10 ENT  COMP
Answer:
$6,511,226 ( N.P.V. )
80
Provide Financial & Business Performance Information - Solutions
13.
( a ) Total Cash Flow
Year 1
Year 2
Year 3
( b ) Average profit p.a.
Cash Flow
9,000,000 12,000,000 15,000,000 Net Profit after tax
Period
( c ) Accounting Rate of return =
Depreciation
6,000,000 =
6,000,000 =
6,000,000 =
= 18,000,000
3
=
Net Profit
3,000,000
6,000,000
9,000,000
6,000,000
Av profit after tax = 6,000,000 = 331/3%
Investment cost
18,000,000
( d ) Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 18,000,000 ENT, 9,000,000 ENT, 12,000,000 ENT, 15,000,000 ENT
2nd F CFI, i 0 COMP
Answer:
40.07% ( I.R.R. )
on/C
(e)
2nd F CFI, i 10 ENT  COMP
Answer:
14.
$9,252,920 ( N.P.V. )
Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
( a ) - 7,000 ENT, 3,100 ENT, 2,400 ENT, 1,900 ENT, 1,500 ENT, 2,200 ENT
2nd F CFI, i 0 COMP
Answer:
19.69% ( I.R.R. )
on/C
(b)
2nd F CFI, i 12 ENT  COMP
Answer:
$1,235.12 ( N.P.V. )
( c ) Payback Period 2.79 years ( i.e. 2 + 1,500 / 1,900 )
81
Provide Financial & Business Performance Information - Solutions
15.
Depreciation $10,000
( a ) Cash Income
Cash Expenses
Depreciation
59,000
- 19,000
- 10,000
30,000
9,000
21,000
10,000
31,000
Tax @ 30%
NPAT
Depreciation
Annual Cash Flow
(b)
Average Profit
Original Investment
21,000
100,000
21%
(c)
Payback Period
100,000
31,000
3.23 Years
(d)
- 100,000 ENT, 31,000 ENT, 31,000 ENT, 31,000 ENT, 31,000 ENT, 31,000
31,000 ENT, 31,000 ENT, 31,000 ENT, 31,000 ENT, 31,000
2nd F CFI, i 0 COMP
Answer:
28.47% ( I.R.R. )
on/C
( e ) 2nd F CFI, i 20 ENT  COMP
Answer:
$29,967 ( N.P.V. )
16.
(a)
Cash Income
Cash Expenses
Depreciation
Tax @ 30%
NPAT
Depreciation
Annual Cash Flow
90,000
- 40,000
- 32,000
18,000
5,400
12,600
32,000
44,600
(b)
Average Profit
Average Investment
12,600
100,000
12.60%
(c)
Capital Outlay
Annual Cash Inflow
180,000
44,600
4.04 Years
( d ) Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 180,000 ENT, 44,600 ENT, 44,600 ENT, 44,600 ENT, 44,600 ENT, 44,600
2nd F CFI, i 0 COMP
Answer:
7.59% ( I.R.R. )
on/C
( e ) 2nd F CFI, i 10 ENT  COMP
Answer:
- 10,931 ( N.P.V. )
(f)
Reject
82
Provide Financial & Business Performance Information - Solutions
17.
(a)
Net Profit before tax and Depreciation
Less Depreciation
Net Profit before tax
Tax @ 30%
Net Profit after tax
50,000
- 20,000
30,000
- 9,000
$ 21,000
(b)
Annual Cashflow
$ 41,000
(c)
Accounting Rate of Return
(d)
Payback Period
( $21,000 + $20,000 )
( $21,000 / $100,000 )
21%
( $100,000 / $21,000 )
4.76 years
( e ) Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 100,000 ENT, 41,000 ENT, 41,000 ENT, 41,000 ENT, 41,000 ENT, 41,000
2nd F CFI, i 0 COMP
Answer:
29.93% ( I.R.R. )
Answer:
$72,707 ( N.P.V. )
on/C
( f ) 2nd F CFI, i 6 ENT  COMP
18.
(a)
(b)
Accounting Rate of Return on Average Investment
Average Profit
=
2
=
Average Investment
4
Accounting Rate of Return on Total Investment
Average Profit
Investment
(c)
50%
=
2
8
Payback Period
=
25%
=
3.00 years
( d ) Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 8,000,000 ENT, - 2,000,000 ENT, 4,000,000 ENT, 6,000,000 ENT, 8,000,000
2nd F CFI, i 0 COMP
Answer:
21.84% ( I.R.R. )
on/C
( e ) 2nd F CFI, i 20 ENT  COMP
Answer: $441,358 ( N.P.V. )
83
Provide Financial & Business Performance Information - Solutions
19.
(a)
– 10 – 30
60 – 30
90 – 30
=
=
=
– 40
30
60
(b)
[ – 40 + 30 + 60 ]
3
=
16.67 million
(c)
16.67
45
=
37.04%
( d ) Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 90,000,000 ENT, - 10,000,000 ENT, 60,000,000 ENT, 95,000,000 ENT
2nd F CFI, i 0 COMP
Answer:
19.17% ( I.R.R. )
on/C
( e ) 2nd F CFI, i 10 ENT  COMP
20.
Cash income
Cash expenses
Profit before depreciation and tax
Less Depreciation
Profit before tax
Less Tax @ 30%
Net Profit after tax
Add back Depreciation
Annual Cash Flow
Answer: $21,870,774 ( N.P.V. )
Project Delta
$140
80
60
20
40
12
28
20
48
Project Gamma
$70
50
20
10
10
3
7
10
17
( a ) Accounting Rate of Return
NPAT
Average Investment
28 = 14.00%
200
7 = 7.00%
100
( b ) Payback period
Capital Outlay
Annual Cash Flow
200 = 4.17
48
100 = 5.88
17
years
years
( c ) Internal rate of Return
= 20.23%
= 11.28%
( d ) Net Present Value
= 32.45 m
= - 17.16 m
(e) (i)
( ii )
Projects Independent
Accept Delta. As project exceed required rate of return and has a
positive NPV.
Projects Mutually Exclusive
Accept Project Delta because it has a positive NPV.
84
Provide Financial & Business Performance Information - Solutions
21.
Note: Reducing Balance
Depreciation Schedule
Less
Less
Less
Less
Less
Cost
Depreciation
WDV
Depreciation
WDV
Depreciation
WDV
Depreciation
WDV
Depreciation
WDV
Salvage
Loss
25% D.V.
30% tax
tax effect
315,000
78,750
236,250
59,063
177,188
44,297
132,891
33,223
99,668
24,917
74,751
- 20,000
54,751
30%
23,625
30%
17,719
30%
13,289
30%
9,967
30%
7,475
30%
16,425
Tax
30%
Cash flow
Year /Item
Cost
Savings
Tax on saving
0
- 315,000
1
2
3
PVIF
10%
4
5
65,000 65,000 65,000 65,000 65,000
- 19,500 - 19,500 - 19,500 - 19,500 - 19,500
Tax effect depreciation
23,625 17,719 13,289
9,967
7,475
Tax loss on sale
16,425
Salvage
20,000
- 315,000 69,125 63,219 58,789 55,467 89,400
Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 315,000 ENT, 69,125 ENT, 63,219 ENT, 58,789 ENT, 55,467 ENT , 89,400 ENT
2nd F CFI, i 0 COMP
Answer:
2.12% ( I.R.R. )
on/C
2nd F CFI, i 10 ENT  COMP
Answer: $62,348 ( N.P.V. )
85
Provide Financial & Business Performance Information - Solutions
22.
Forest Products Company
Year / Item
Purchase cost
Tax benefit Depn.
Net cost savings
Tax effect
Disposal
Tax on profit
0
- 500,000
1-4
30,000
41,000
- 12,300
- 500,000
58,700
5
30,000
41,000
- 12,300
20,000
- 6,000
72,700
Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 500,000 ENT, 58,700 ENT, 58,700 ENT, 58,700 ENT, 58,700 ENT , 72,700 ENT
2nd F CFI, i 0 COMP
Answer:
on/C
(a)
2nd F CFI, i 10 ENT  COMP
Answer: - 268,788 ( N.P.V. )
(b)
13.91% ( I.R.R. )
The payback method of project evaluation measures the time (in years) it
takes to recoup the original investment based on annual cash inflows. It
does not take into consideration cash flows after the payback period. It
ignores the time value of cash flows. It is useful as an initial screening
process to evaluate investment opportunities.
86
Provide Financial & Business Performance Information - Solutions
23.
The tax benefit is the difference between new and old.
W.D.V. ( old )
$750,000
Disposal
- 450,000
Loss
300,000 x 30 % = $90,000
Resulting in a tax benefit of $90,000 in year 1
Year
W.D.V. old
Depn@20% W.D.V. new
Depn@20%
Difference
Tax Benefit
1
750,000
150,000 1,750,000
350,000
200,000 x 30%
60,000
2
600,000
150,000 1,400,000
350,000
200,000 x 30%
60,000
3
450,000
150,000 1,050,000
350,000
200,000 x 30%
60,000
4
300,000
150,000
700,000
350,000
200,000 x 30%
60,000
5
150,000
150,000
350,000
350,000
200,000 x 30%
60,000
Cost
Depn Tax Benefit
Salvage
Loss on Sale
Savings
Tax Effect
Salvage
Tax Profit
Total
0
- 1,750,000
1
2
3
4
5
60,000
60,000
60,000
60,000
60,000
90,000
250,000
-75,000
250,000
-75,000
250,000
-75,000
250,000
-75,000
325,000
235,000
235,000
235,000
250,000
-75,000
300,000
- 90,000
445,000
450,000
- 1,300,000
Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 1,300,000 ENT, 325,000 ENT, 235,000 ENT, 235,000 ENT, 235,000 ENT , 445,000 ENT
2nd F CFI, i 0 COMP
Answer:
4.14% ( I.R.R. )
Answer:
- 166,878 ( N.P.V. )
on/C
2nd F CFI, i 9 ENT  COMP
87
Provide Financial & Business Performance Information - Solutions
24.
Additional working capital returned at the end of the project.
Old Machine
Cost
$100,000
Accumulated Depreciation
- 100,000
Written Down Value
0
Profit
Sold ( Current Salvage Value )
Therefore
Tax on profit on sale @ 30%
Purchase
0
- 105,000
Salvage old machine
1
6,000
2–5
6 – 15
20,000
Tax Effect gain
- 6,000
Additional Cash flow
Tax on above
Depn. Tax benefit
Total Cash flow
20,000
- 85,000
30,000
30,000
30,000
- 9,000
- 9,000
- 9,000
6,300
6,300
21,300
27,300
21,000
Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 85,000 ENT, 21,300 ENT, 27,300 ENT, 27,300 ENT, 27,300 ENT , 27,300 ENT
21,000 ENT ( ten times for years 6 – 15 )
2nd F CFI, i 0 COMP
Answer:
27.78% ( I.R.R. )
on/C
2nd F CFI, i 12 ENT  COMP
Answer:
$75,381 ( N.P.V. )
Yes as the N.P.V. $ 75,381 is positive
Note: Tax Depreciation = $105,000 = $21,000 x 30% = $6,300
5
88
Provide Financial & Business Performance Information - Solutions
25.
Note: no spare parts
Old machine
Written down value of $37,500.
50,000
Cost
2
50,000
Accum depn
3
50,000
WDV =
4
50,000
5
12,500
212,500
Depreciation Year 1
Part year
Accum depn
Year
Year
Year
Year
0
1
Purchase
- 240,000
Tax benefit depn. ( a )
14,400
Tax benefit on old forgone ( b )
- 11,250
Trade-in
80,000
Tax Effects gain ( c )
- 12,750
Incremental cash flow ( d )
40,000
Tax effect cash flows
- 12,000 Salvage value
Tax effect on gain
- 160,000 18,400
$250,000
- 212,500
$ 37,500
2
14,400
3
14,400
4
14,400
Answer:
7.29% ( I.R.R. )
on/C
2nd F CFI, i 12 ENT  COMP
Answer: - 20,642 ( N.P.V. )
Note
( a ) Depn tax benefit $240,000 x 20% x 30% = 14,400
( b ) Tax benefit old foregone $37,500 x 30% = 11,250
( c ) Tax effect gain 80,000 - 37,500 x 30% = 12,750
( d ) Cash flows ( 80,000 + 10,000) less 50,000
89
14,400
40,000 40,000 40,000 40,000
12,000 - 12,000 - 12,000 - 12,000
20,000
- 6,000
42,400 42,400 42,400 56,400
Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 160,000 ENT, 18,400 ENT, 42,400 ENT, 42,400 ENT, 42,400 ENT , 56,400 ENT
2nd F CFI, i 0 COMP
5
Provide Financial & Business Performance Information - Solutions
26.
Old machine
Sale price
WDV
Gain
8,000
6,400
1,600
Tax Effect @ 30%
- 480
Depreciation Schedule
Depreciation New
Depreciation Old
Difference
Tax benefit at 30%
Old machine
Old
W.D.V.
Year 1 Depn
W.D.V.
Year 2 Depn
W.D.V.
$6,400
- 3,400
3,000
- 3,000
0
1
5,270
3,400
1,870
2
5,270
3,000
2,270
3
5,270
4
5,270
5
5,270
6
5,270
5,270
5,270
5,270
5,270
561
681
1,581
1,581
1,581
1,581
Net Present Value
0
1
2
3
4
5
6
Cost Buy
- 31,620
Tax benefit Depreciation
561
681 1,581 1,581 1,581 1,581
Salvage Old(a)
8,000
Tax effect gain
- 480
Cash Flow
8,500 8,500 8,500 8,500 8,500 8,500
Tax on cash flow
- 2,550 - 2,550 - 2,550 - 2,550 - 2,550 - 2,550
Salvage New machine
5,000
Tax effect sale
- 1,500
Total
- 23,620 6,031 6,631 7,531 7,531 7,531 11,031
Using Sharp EL 738 financial calculator: ( clear 2ndF ALPHA 0 0 )
- 23,620 ENT, 6,031 ENT, 6,631 ENT, 7,531 ENT, 7,531 ENT, 7,531 ENT, 11,031 ENT
2nd F CFI, i 0 COMP
Answer:
21.12% ( I.R.R. )
on/C
2nd F CFI, i 10 ENT  COMP
Answer:
90
$9,048 ( N.P.V. )