Chapter 12

 

3. Assume a firm has earnings before depreciation and taxes of $500,000 and no depreciation. It is in a 40 percent tax bracket.  

a.) Compute its cash flow.

 

b.) Assume it has $500,000 in depreciation. Recompute its cash flow.

 

c.) How large a cash flow benefit did the depreciation provide?

 

6. Assume a $200,000 investment and the following cash flows for two products:

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Year  Product X  Product Y

1……………….    $60,000       $40,000

2……………….      90,000         70,000

3……………….      50,000         80,000

4……………….      40,000         20,000

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     Which alternative would you select under the payback method?

 

11. You buy a new piece of equipment for $11,778, and you receive a cash inflow of $2,000 per year for 10 years. What is the internal rate of return?

 

18. The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $45,000. The annual cash flows have the following projections:

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Year  Cash Flow

1……………  $15,000

2……………    20,000

3……………    25,000

4……………    10,000

5……………      5,000

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a.) If the cost of capital is 10 percent, what is the net present value of selecting a new machine?

 

b.) What is the internal rate of return?

 

c.) Should the project be accepted? Why?