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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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