Block 14e

Pr 12-3

Problem 12-3 Cash flow [LO2]

Assume a firm has earnings before depreciation and taxes of $100,000 and $5
tax bracket.
a. Compute its cash flow.
b. Assume it has $10,000 in depreciation. Recompute its cash flow.
c. How large a cash flow benefit did the depreciation provide?

All input values are shown in yellow. Only these values need changed
Answers are displayed in red.
Connect tolerances are listed below the solution.
Assumptions and other problem notes are displayed at the very botto
Input variables:
Earnings before depreciation and taxes
Depreciation
Tax rate
b. Depreciation

$100,000
$50,000
30
$10,000

Solution and Explanation:

a.
Earnings before depreciation and taxes
Depreciation
Earnings before taxes
Taxes
Earnings after taxes
Depreciation
Cash flow

$100,000
50000
$50,000
15,000
$35,000
50000
$85,000

b.
Earnings before depreciation and taxes
Depreciation
Earnings before taxes
Taxes
Earnings after taxes
Depreciation

$100,000
10,000
$90,000
27000
$63,000
10,000

Cash flow
c.
Cash flow benefit

$73,000

-$12,000

Connect tolerances:
For values:
Decimal values with 3 or more places (.xxx or
more)
Decimal values with 1 or 2 places (.x or .xx)
1 - 1,000
1,001 - 1 million
> 1 million
Problem notes:

1%
.1
1%
.1%
.01%

es of $100,000 and $50,000 depreciation. It is in a 30 percent

s cash flow.
ovide?

alues need changed to review algo versions.

ed at the very bottom.

percent

an absolute value

Block 14e
Pr 12-9

Problem 12-9 Payback method [LO3]

The Short-Line Railroad is considering a $100,000 investment in either of two com
follows:
a. Compute the payback period for both companies.
b. Which of the investments is superior from the information provided?
All input values are shown in yellow. Only these values need changed to
Answers are displayed in red.
Connect tolerances are listed below the solution.
Assumptions and other problem notes are displayed at the very bottom.
Input variables:
Investment amount
Cash flows:
Year 1
Year 2
Year 3
Year 4-10

$100,000
Electric Co.
$70,000
15,000
15,000
10,000

Solution and Explanation:

a.
Electric Co.:
Cash flows

Initial investment
Year 1
Year 2
Year 3
Year 4
Payback period

$70,000
15,000
15,000
10,000
3.00

Water Works:
Cash flows

Initial investment
Year 1
Year 2

$15,000
15,000

Year 3
Year 4
Payback period
b.
Which investment is superior?

70,000
10,000
3.00

Electric Company

Connect tolerances:
For values:
Decimal values with 3 or more
places (.xxx or more)
Decimal values with 1 or 2 places
(.x or .xx)
1 - 1,000
1,001 - 1 million
> 1 million
Problem notes:

1%
.1
1%
.1%
.01%

(? - double check)

0,000 investment in either of two companies. The cash flows are as

mpanies.
m the information provided?

nly these values need changed to review algo versions.

e solution.
are displayed at the very bottom.

Water Works
$15,000
15,000
70,000
10,000

Amount yet to be Recovered

$100,000
30,000
15,000
0
0

years

Amount yet to be Recovered

$100,000
85,000
70,000

This solution works only if the payback is between 3 and 4 years.

0
0

years

Company

(? - double check)

an absolute value

This solution works only if the payback is between 3 and 4 years.

(If the payback periods are equal, select the investment with the higher c

ween 3 and 4 years.

ween 3 and 4 years.

investment with the higher cash inflows in the early years.)

Block 14e
Pr 12-10

Problem 12-10 Payback and net present value [LO3, 4]

Dias Camera Company is considering two investments, both of which cost $1

are as follows:

Use Appendix B for an approximate answer but calculate your final answer u
financial calculator methods.

a-1. Calculate the payback period for Project A and Project B. (Round your an
places.)
a-2. Which of the two projects should be chosen based on the payback meth
b-1. Calculate the net present value for Project A and Project B. Assume a co
percent. (Do not round intermediate calculations and round your final answe
places.)
b-2. Which of the two projects should be chosen based on the net present va
c. Should a firm normally have more confidence in the payback method or th
method?

All input values are shown in yellow. Only these values need change
Answers are displayed in red.
Connect tolerances are listed below the solution.

Assumptions and other problem notes are displayed at the very bott
Input variables:
Investment amount
Cash flows:

$10,000
Investment A

Year 1

$6,000

Year 2

4,000

Year 3
b-1. Cost of capital

3,000
.10

Appendix values:
Year 1
Year 2
Year 3

7510.000
7510.000
7510.000

Solution and Explanation:

a-1.
Project A:
Cash flows

Initial investment
Year 1
Year 2
Year 3

$6,000
4,000
3,000

The initial investment is fully recovered in less than one year. The partial year is computed as
the initial investment divided by the Year 1 cash flow, so:
Payback period A =

1.67

Project B:
Cash flows

Initial investment
Year 1
Year 2
Year 3
Payback period B

$5,000
3,000
8,000
2.67

a-2.
Which project should be selected
based on payback?
b-1.
NPVA

$1,014.27

NPVB

$3,035.31

b-2.
Which project should be selected
based on NPV?
c.
Which method is preferred?

Project B

NPV

Appendix values
Project A:
Year 1 PV
Year 2 PV
Year 3 PV
PV of inflows
NPV
Project B:
Year 1 PV
Year 2 PV
Year 3 PV
PV of inflows
NPV

$45,060,000
30,040,000
22,530,000
$97,630,000
$97,620,000

$37,550,000
22,530,000
60,080,000
$120,160,000
$120,150,000

Connect tolerances:
For values:
Decimal values with 3 or more places
(.xxx or more)
Decimal values with 1 or 2 places (.x
or .xx)
1 - 1,000
1,001 - 1 million
> 1 million
Problem notes:

1%
.1
1%
.1%
.01%

e [LO3, 4]

estments, both of which cost $10,000. The cash flows

ut calculate your final answer using the formula and

A and Project B. (Round your answers to 2 decimal

sen based on the payback method?

ect A and Project B. Assume a cost of capital of 10
ons and round your final answers to 2 decimal

sen based on the net present value method?

nce in the payback method or the net present value

ly these values need changed to review algo versions.

solution.

re displayed at the very bottom.

Investment B
$5,000
3,000
8,000
Input as a decimal

Amount yet to be
Recovered
$10,000
0
0 This solution works only as long as the payback is 1 year or less. Otherwise, ad
0

year. The partial year is computed as

year

Amount yet to be
Recovered
$10,000
5,000
0 This solution works only as long as the payback is between 1 and 2 years. Oth
0

years

Project A

an absolute value

r or less. Otherwise, adjustments need made.

een 1 and 2 years. Otherwise, adjustments need made.

Block 14e
Pr 12-12
Problem 12-12 Internal rate of return [LO-4]

Kings Department Store is contemplating the purchase of a new machine at a c

will provide $3,000 per year in cash flow for six years. Kings has a cost of capit
D for an approximate answer but calculate your final answer using the financial
a. What is the internal rate of return? (Do not round intermediate calculations.
rounded to 2 decimal places.)
b. Should the project be undertaken?

All input values are shown in yellow. Only these values need changed t
Answers are displayed in red.
Connect tolerances are listed below the solution.
Assumptions and other problem notes are displayed at the very bottom
Input variables:
Initial cost
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Year 11
Year 12
Year 13
Year 14
Year 15
Cost of capital

-$13,869
$3,000
$3,000
$3,000
$3,000
$3,000
$3,000
$3,000
$3,000
$3,000
$3,000
$3,000
$3,000
$3,000
$3,000
$3,000
12%

Solution and Explanation:

a.
IRR

20.27%

b.
Should the project be undertaken?
Appendix value

Yes
4.623

Connect tolerances:
For values:
Decimal values with 3 or more places (.xxx or more)
Decimal values with 1 or 2 places (.x or .xx)
1 - 1,000
1,001 - 1 million
> 1 million
Problem notes:

1%
.1
1%
.1%
.01%

a new machine at a cost of $13,869. The machine

s has a cost of capital of 12 percent. Use Appendix
er using the financial calculator method.

ediate calculations. Enter your answer as a percent

es need changed to review algo versions.

at the very bottom.

Input as a negative value

Input as a decimal

an absolute value

Block 14e
Pr 12-15
Problem 12-15 Net present value method [LO4]

The Hamilton Control Systems will invest $90,000 in a temporary project that will
following cash inflows for the next three years. Use Appendix B for an approxima
calculate your final answer using the formula and financial calculator methods.

The firm will also be required to spend $10,000 to close down the project at the e
years.

a. Compute the net present value if the cost of capital is 10 percent. (Negative a
indicated by a minus sign. Do not round intermediate calculations and round you
decimal places.)
b. Should the investment be undertaken?

All input values are shown in yellow. Only these values need changed to
Answers are displayed in red.
Connect tolerances are listed below the solution.
Assumptions and other problem notes are displayed at the very bottom
Input variables:
Initial investment
Year 1
Year 2
Year 3
Year 3 shut down costs
Cost of capital
Table factors:
Year 1
Year 2
Year 3

-$90,000 Input as a negative value

$23,000
$38,000
$60,000
$15,000 Input as a negative value
10.00 In decimal form
22530.000
22530.000
22530.000

Solution and Explanation:

a.
NPV
b.
Should the project be undertaken?
Appendix answers:

-$87,538.69

No

Inflows:
Year 1
Year 2
Year 3
Total
Outflows:
Year 1
Year 3
Total
NPV

###
856,140,000
###
###
$90,000
###
###
###

Connect tolerances:
For values:
Decimal values with 3 or more places
(.xxx or more)
Decimal values with 1 or 2 places (.x
or .xx)
1 - 1,000
1,001 - 1 million
> 1 million
Problem notes:

1%
.1 an absolute value
1%
.1%
.01%

mporary project that will generate the

ndix B for an approximate answer but
al calculator methods.

down the project at the end of the three

10 percent. (Negative amount should be

culations and round your answer to 2

lues need changed to review algo versions.

ed at the very bottom.

nput as a negative value

nput as a negative value

n decimal form

n absolute value

Block 14e
Pr 12-16
Problem 12-16 Net present value method [LO4]

Cellular Labs will invest $150,000 in a project that will not begin to produce retu
year. From the end of the 3rd year until the end of the 12th year (10 periods), th
$40,000.
Use Appendix B and Appendix D for an approximate answer but calculate your
and financial calculator methods.

a. Calculate the net present value if the cost of capital is 12 percent. (Negative
by a minus sign. Do not round intermediate calculations and round your answer
b. Should the project be undertaken?

All input values are shown in yellow. Only these values need changed t
Answers are displayed in red.
Connect tolerances are listed below the solution.
Assumptions and other problem notes are displayed at the very bottom
Input variables:

Initial investment
Years with no payment
Years with payment
Payment amount
Cost of capital
Appendix factors:
PVIFA
PVIF

-$150,000
3
10
$40,000
.12
5.650
.797

Solution and Explanation:

a.
PV
NPV
b.
Should the project be undertaken?
Appendix values:
PVIFA

$226,008.92
$10,868.69

Yes

$226,000.00

PVIF
NPV

$180,122.00
$30,122.00

Connect tolerances:
For values:
Decimal values with 3 or more places
(.xxx or more)
Decimal values with 1 or 2 places (.x
or .xx)
1 - 1,000
1,001 - 1 million
> 1 million
Problem notes:

1%
.1
1%
.1%
.01%

begin to produce returns until the end of the 3rd

h year (10 periods), the annual cash flow will be

er but calculate your final answer using the formula

12 percent. (Negative amount should be indicated

d round your answer to 2 decimal places.)

ues need changed to review algo versions.

at the very bottom.

Input as a negative value

years
years
In decimal form
Number of years with payment
Number of years with no payment

an absolute value

Block 14e
Pr 12-22

Problem 12-22 Capital rationing and mutually exclusive investments [LO4]

The Suboptimal Glass Company uses a process of capital rationing in its decision
percent. It will only invest $60,000 this year. It has determined the internal rate o

a. Pick out the projects that the firm should accept. (You may select more than on
question mark to produce a check mark for a correct answer and double click the
box for a wrong answer.)
b. If Projects A and B are mutually exclusive, which projects would you accept in
than one answer. Single click the box with the question mark to produce a check
the box with the question mark to empty the box for a wrong answer.)

All input values are shown in yellow. Only these values need changed to
Answers are displayed in red.
Connect tolerances are listed below the solution.
Assumptions and other problem notes are displayed at the very bottom
Input variables:
Project
A
B
C
D
E
F
G

Size

IRR
$10,000
$30,000
$25,000
$10,000
$10,000
$20,000
$15,000

15
14
16.5
17
23
11
16

Solution and Explanation:

a.
Select projects from highest IRR to lowest IRR stopping when the investment lim

b. Compare projects x and y and delete from the list above the project with the lo
1.

2 ) Having eliminated Project x or y, select projects from highest IRR to lowest IR

Connect tolerances:
For values:
Decimal values with 3 or more
places (.xxx or more)

1%

Decimal values with 1 or 2

places (.x or .xx)
1 - 1,000
1,001 - 1 million
> 1 million
Problem notes:

.1 an absolute value
1%
.1%
.01%

xclusive investments [LO4]

of capital rationing in its decision making. The firms cost of capital is 13
as determined the internal rate of return for each of the following projects.

ept. (You may select more than one answer. Single click the box with the
rrect answer and double click the box with the question mark to empty the

hich projects would you accept in spending the $60,000? (You may select more
uestion mark to produce a check mark for a correct answer and double click
x for a wrong answer.)

these values need changed to review algo versions.

displayed at the very bottom.

opping when the investment limit is reached.

e list above the project with the lower IRR.

cts from highest IRR to lowest IRR stopping when the investment limit is reached.

n absolute value

Block 14e
Pr 12-24

Problem 12-24 Net present value profile [LO4]

Davis Chili Company is considering an investment of $15,000, which produces th
inflows:

Use Appendix B for an approximate answer but calculate your final answer using
financial calculator methods.

a. Determine the net present value of the project based on a zero percent discou
b. Determine the net present value of the project based on a 10 percent discoun
round intermediate calculations and round your answer to 2 decimal places.)
c. Determine the net present value of the project based on a 15 percent discoun
round intermediate calculations and round your answer to 2 decimal places.)

All input values are shown in yellow. Only these values need changed to
Answers are displayed in red.
Connect tolerances are listed below the solution.
Assumptions and other problem notes are displayed at the very bottom
Input variables:
Initial investment
Year 1
Year 2
Year 3
b. Discount rate
c. Discount rate

-$15,000 input as a negative value

$8,000
$7,000
$4,000
.10 input as a decimal
.20 input as a decimal

Appendix factors
b. PV 1 year
b. PV 2 years
b. PV 3 years
c. PV 1 year
c. PV 2 years
c. PV 3 years
Solution and Explanation:
a.
NPV
b.

$4,000

NPV

$1,063.11

c.
NPV

-$1,157.41

Appendix values:
b.
1 year
2 years
3 years
PV of inflows
NPV

$0.00
0.00
0.00
$0.00
-$15,000.00

c.
1 year
2 years
3 years
PV of inflows
NPV

$0.00
0.00
0.00
$0.00
-$15,000.00

Connect tolerances:
For values:
Decimal values with 3 or more
places (.xxx or more)
Decimal values with 1 or 2 places
(.x or .xx)
1 - 1,000
1,001 - 1 million
> 1 million
Problem notes:

1%
.1 an absolute value
1%
.1%
.01%

of $15,000, which produces the following

culate your final answer using the formula and

based on a zero percent discount rate.

based on a 10 percent discount rate. (Do not
swer to 2 decimal places.)
based on a 15 percent discount rate. (Do not
swer to 2 decimal places.)

ese values need changed to review algo versions.

splayed at the very bottom.

put as a negative value

put as a decimal
put as a decimal

n absolute value

Block 14e
Pr 12-32

Problem 12-32 Capital budgeting with cost of capital computation [LO5]

DataPoint Engineering is considering the purchase of a new piece of equipment fo

depreciation range (ADR). It will require an additional initial investment of $140,0
thousand dollars of this investment will be recovered after the sixth year and will
before depreciation and taxes for the next six years are shown in the following tab
for an approximate answer but calculate your final answer using the formula and

The tax rate is 30 percent. The cost of capital must be computed based on the fol

a. Determine the annual depreciation schedule. (Do not round intermediate calcu
depreciation answers to the nearest whole dollar. Round your percentage deprecia
b. Determine the annual cash flow for each year. Be sure to include the recovered
intermediate calculations and round your answers to 2 decimal places.)
c. Determine the weighted average cost of capital. (Do not round intermediate ca
to 2 decimal places.)
d-1. Determine the net present value. (Use the WACC from part c rounded to 2 de
12.34%). Do not round any other intermediate calculations. Round your answer to
d-2. Should DataPoint purchase the new equipment?

All input values are shown in yellow. Only these values need changed to
Answers are displayed in red.
Connect tolerances are listed below the solution.
Assumptions and other problem notes are displayed at the very bottom.
Input variables:
Equipment cost
Working capital
Working capital recovery
Year 1 EBDT
Year 2 EBDT
Year 3 EBDT
Year 4 EBDT
Year 5 EBDT
Year 6 EBDT
Tax rate
Debt aftertax cost
Debt weight

$220,000
$120,000
$30,000
$170,000
$150,000
$120,000
$105,000
$90,000
$80,000
.30
.065
.30

Preferred stock cost

Preferred stock weight
Common equity cost
Common equity weight
MACRS 5-year rates:
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6

.102
.10
.150
.60
.200
.320
.192
.115
.115
.058

Solution and Explanation:

a. and b.
EBDT
Depreciation
EBT
Taxes
EAT
Depreciation
Net working capital recovery
Cash flow
c.
WACC

Year 1
$170,000
$44,000
$126,000
$37,800
$88,200
$44,000
$132,200

11.97%

d-1.
NPV

$84,808.49

d-2.
Should the equipment be purchased?

Yes

d-1. Table Solution.

Adjust the PV rates and factors for eac

Year
1
2
3
4
5
6

Cash Flow (inflows)

$132,200
126,120
96,672
81,090
70,590
89,828

Present value of inflows

Present value of outflows
Net present value
The present value of outflows includes $240,000 for equipment and $140,000 for

Year
1
2
3
4
5
6

Cash Flow (inflows)

$132,200
126,120
96,672
81,090
70,590
89,828
Present value of inflows
Present value of outflows
Net present value

Rate %
15.00
13.50
12.00

putation [LO5]

ew piece of equipment for $220,000. It has an eight-year midpoint of its asset

al investment of $140,000 in nondepreciable working capital. Thirty
r the sixth year and will provide additional cash flow for that year. Income
hown in the following table. Use Table 1211, Table 1212. Use Appendix B
r using the formula and financial calculator methods.

mputed based on the following:

round intermediate calculations. Round your depreciation base and annual

your percentage depreciation answers to 3 decimal places.)
to include the recovered working capital in Year 6. (Do not round
cimal places.)
ot round intermediate calculations. Enter your answer as a percent rounded

m part c rounded to 2 decimal places as a percent as the cost of capital (e.g.,

ns. Round your answer to 2 decimal places.)

lues need changed to review algo versions.

d at the very bottom.

Input as a decimal
Input as a decimal
Input as a decimal

Input as a decimal
Input as a decimal
Input as a decimal

Year 2
$150,000
$70,400
$79,600
$23,880
$55,720
$70,400

Year 3
$120,000
$42,240
$77,760
$23,328
$54,432
$42,240

Year 4
$105,000
$25,300
$79,700
$23,910
$55,790
$25,300

Year 5
$90,000
$25,300
$64,700
$19,410
$45,290
$25,300

$126,120

$96,672

$81,090

$70,590

(This is a rounded value, which is the value to be used in d-1.)

rates and factors for each problem.

PVIF at 15%
.870
.756
.658
.572
.497
.432

Present Value
$115,014
95,347
63,610
46,383
35,083
38,806

Year 6
$80,000
$12,760
$67,240
$20,172
$47,068
$12,760
$30,000
$89,828

of inflows
of outflows

$394,243
340,000
$54,243

pment and $140,000 for working capital.

PVIF at 12%
.893
.797
.712
.636
.567
.507
of inflows
of outflows

Present Value
$118,055
100,518
68,830
51,573
40,025
45,543
$424,543
340,000
$84,543

Net present value

$54,243
?
84,543
NPV =

$39,093