Problems Solutions Chapter 8 Gitman´S Book

1429 words - 6 pages

part

8-3 LG 3: Relevant Cash Flow Pattern Fundamentals

a. Year Cash Flow

Initial investment ($120,000)

1-18 $25,000 - $5,000 = $ 20,000

0 1 2 3 16 17 18

-120,000 20,000 20,000 20,000 ----------------- 20,000 20,000 20,000

b. Initial investment ($85,000 - $30,000) = ($55,000)

1-5 = $ 20,000

6 $20,000 + $20,000 - $10,000 = $ 30,000

0 1 2 3 4 5 6

-55,000 20,000 20,000 20,000 20,000 20,000 30,000

c. Initial investment ($2,000,000)

1-5 $300,000 - $20,000 = $ 280,000

6 $300,000 - $500,000 = ($ 200,000)

7-10 $300,000 - $20,000 = $ 280,000

0 1 2 5 6 7 10

-2,000,000 280,000 280,000 •••••• 280,000 -200,000 280,000 •• 280,000

8-9 LG 4: Change in Net Working Capital Calculation

a. Current assets Current liabilities

Cash $ + 15,000 Accounts payable $ + 90,000

Accounts receivable + 150,000 Accruals + 40,000

Inventory - 10,000

Net change $ 155,000 $ 130,000

Net working capital = current assets - current liabilities

NWC = $155,000 - $130,000

NWC = $ 25,000

b. Analysis of the purchase of a new machine reveals an increase in net working capital. This increase should be treated as an initial outlay and is a cost of acquiring the new machine.

c. Yes, in computing the terminal cash flow, the net working capital increase should be reversed.

8-12 LG 4: Initial investment at Various Sale Prices

(a) (b) (c) (d)

Installed cost of new asset:

Cost of new asset $24,000 $24,000 $24,000 $24,000

+ Installation cost 2,000 2,000 2,000 2,000

Total installed-cost $26,000 $26,000 $26,000 $26,000

After-tax proceeds from sale

of old asset

Proceeds from sale

of old asset (11,000) (7,000) (2,900) (1,500)

+ Tax on sale of old asset* 3,240 1,640 0 (560)

Total after-tax proceeds ( 7,760) (5,360) (2,900) (2,060)

Initial investment $18,240 $20,640 $23,100 $23,940

Book value of existing machine = $10,000 x [1 - (.20 -.32 -.19)] = $2,900

* Tax Calculations:

a. Recaptured depreciation = $10,000 - $2,900 = $7,100

Capital gain = $11,000 - $10,000 = $1,000

Tax on ordinary gain = $7,100 x (.40) = $2,840

Tax on capital gain = $1,000 x (.40) = 400

Total tax = $3,240

b. Recaptured depreciation = $7,000 - $2,900 = $4,100

Tax on ordinary gain = $4,100 x (.40) = $1,640

c. 0 tax liability

d. Loss on sale of existing asset = $1,500 - $2,900 = ($1,400)

Tax benefit = - $1,400 x (.40) = $560

8-16 LG 5: Incremental Operating Cash Inflows

a.

Expenses Profits Before Operating

(excluding Depreciation Net Profits Net Profits Cash

Year Revenue...

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