Practice Problems Ch12 PDF

Practice Problems Chapter 12
Problems
12-1. Corporate cash flow

Earnings before amortization and taxes $ 90,000
Amortization 40,000
Earnings before taxes 50,000
Taxes @ 30% 15,000
Earnings aftertaxes 35,000
Amortization + 40,000
Cash flow $ 75,000
Alternative cash flow calculation:
$90,000
15,000 (taxes)
$75,000 cash flow
12-2. Corporate cash flow

a. Earnings before amortization and taxes $ 90,000
Amortization 10,000
Taxes @ 30% 24,000
Earnings aftertaxes 56,000
Amortization + 10,000
Cash flow $ 66,000
b. Cash flow (problem 1) $75,000 or [$40,000 $10,000](T)
Cash flow (problem 2a) 66,000 = 30,000 (.3)
Difference in cash flow $ 9,000 = $9,000
Foundations of Fin. Mgt. S-364 8/E Cdn. Block, Hirt, Short

12-3. Blink 281 Corporation
Average earnings aftertax
a. Average accounting return ( AAR ) =
Average book value
Year EBAT Amortization EBT Taxes EAT
1 $35,000 $16,000 $19,000 $7,600 $11,400
2 37,000 16,000 21,000 8,400 12,600
3 41,000 16,000 25,000 10,000 15,000
4 45,000 16,000 29,000 11,600 17,400
5 50,000 16,000 34,000 13,600 20,400
76,800
Average earnings aftertax $15,360
$15,360
Average accounting return ( AAR ) = = 0.3840 = 38.4%
$80,000 / 2
b. Seems like a pretty good return, but we need a criteria for

acceptance of projects. What AAR is enough?
c. AAR does not use the time value of money, cash flows or the
market value of assets.
12-4. Pluto Corporation

1 $110,000 $70,000 $40,000 $16,000 $24,000
2 120,000 70,000 50,000 20,000 30,000
3 150,000 70,000 80,000 32,000 48,000
102,000
$34,000
Average accounting return ( AAR ) = = 0.3238 = 32.38%
$210,000 / 2

12-5. Al Quick
Being short term oriented, he may make the mistake of turning down the
project even though it will increase cash flow because of his fear of
investors negative reaction to the more widely reported quarterly
decline in earnings per share. Even though this decline will be
temporary, investors might interpret it as a negative signal.
12-6. Pluto Corporation

1 $110,000 $70,000 $40,000 $16,000 $24,000
2 120,000 70,000 50,000 20,000 30,000
3 150,000 70,000 80,000 32,000 48,000
102,000
$34,000
Average accounting return (AAR ) = = 0.3238 = 32.38%
($210,000 + 0) / 2
12-7. Payback
Payback for Investment X Payback for Investment Y
$40,000 $ 6,000 1 year $40,000 $15,000 1 year
34,000 8,000 2 years 25,000 20,000 2 years
26,000 9,000 3 years 5,000/ 10,000 2.5 years
17,000 17,000 4 years
Payback: Investment X = 4.00 years
Payback: Investment Y = 2.5 years
Investment Y would be selected because of the faster payback.

12-8. Payback Revisited
The $20,000,000 inflow would still leave the payback period for
Investment X at 4 years. It would remain inferior to Investment Y under
the payback method.
12-9. Payback versus NPV

NPV for Investment X
Year Cash flow Present value @ 15%
1 $ 6,000 $ 5,217
2 8,000 6,049
3 9,000 5,918
4 17,000 9,720
5 20,000 9,944
Present value of inflows $36,848
Initial investment 40,000
NPV (net present value) $(3,152)
NPV for Investment Y

1 $15,000 $13,043
2 20,000 15,123
3 10,000 6,575
NPV (net present value) $(5,259)
Neither project is attractive, with investment Y less attractive.

12-10. Boardwalk Company
a. Payback for Reading Railway Payback for St. Charles
Place
$90,000 $60,000 1 year $90,000 $10,000 1 year
30,000 10,000 2 years 80,000 10,000 2 years
20,000 10,000 3 years 70,000 10,000 3 years
10,000 10,000 4 years 60,000 60,000 4 years
Both projects have equal payback = 4.00 years
b. Reading Railway with a $60,000 payback in year 1 is preferred to St.
Charles with its $60,000 payback in year 4, when we consider the time value
of money.
12-11. Diaz Camera Company

a. Payback for Project A Payback for Project B
$10,000 $6,000 1 year $10,000 $5,000 1 year
4,000 4,000 2 years 5,000 3,000 2 years
2,000 / 8,000 2.25
years
Choose project A
b. NPV for Project A
1 $6,000 $5,455
2 4,000 3,306
3 3,000 2,254
NPV (net present value) $ 1,015

NPV for Project B
1 $5,000 $4,545
2 3,000 2,479
3 8,000 6,011
Both projects are attractive, but project B adds the most value to
the firm. It has the higher NPV.
c. The NPV is preferred and gives more confidence because it
incorporates the time value of money and considers all the cash
flows.
12-12. Hand Salsa

PV $11,778
PVIFA = = = 5.889 ( Appendix D)
A $2,000
For N = 10, we find 5.889 under the 11% column.
Therefore IRR = 11%
Calculator: PV = $11,778 FV = 0 PMT = $2,000
N = 10 %i =?
Compute: %i = 11.00%

12-13. Generation Thumbs
PV $16,980
A $3,000
Therefore IRR = 14%
N = 12 %i =?
12-14. Warner Business Products
PV $11,070
A $2,000
Therefore IRR = 9%
N=8 %i =?
Compute: %i= 9.00%
The machine should not be purchased since its return is under
13%.
12-15. Home Security Systems
a. Year Cash flow PV @ 14% @15%
1 $20,000 $17,544 17,391
2 18,000 13,850 13,611
3 13,000 8,775 8,548
Present value of inflows $40,169 $39,550
Initial investment 40,000 40,000
NPV (net present value) $ 169 $ (450)
IRR is the discount rate at which the NPV = 0. This is a trial and error
process. In this case IRR is between 14% and 15% (14% + 169/ 619 1% =
14.27%)

b. Year Cash flow Present value @ 12%
1 $20,000 $17,857
2 18,000 14,349
3 13,000 9,253
The machine should be purchased as the NPV is positive.
PV of inflows $41,459
c. Profitability index = = = 1.04
PV of outflows $40,000
12-16. Aerospace Dynamics

1 $36,000 $32,432
2 44,000 35,711
3 38,000 27,785
4 (44,000) (28,984)
5 81,000 48,070
Present value of outflows 110,000
NPV(net present value) $ 5,014
The NPV is positive and the project should be undertaken.

12-17. Horizon Corporation
1 $15,000 $13,636
2 25,000 20,661
3 40,000 30,053
3 (10,000) (7,513)
Present value of time zero outflow 60,000
Net present value $(3,163)
The NPV is negative. The project should not be undertaken.
Note, the $10,000 outflow could have been subtracted out of the $40,000
inflow in the third year and the same answer would result.
12-18. Skyline Corporation

Find the present value of a deferred annuity:
PVA = A PVIFA (n = 10, i = 12%) (Appendix D)
PVA = $34,000 5.650 = $192,100
Calculator: PV =? FV = 0 PMT = $34,000
N = 10 %i = 12%
Compute: PV = $192,108
Discount this value to PV from the beginning of the third period (end of
2nd).
PV = FV PVIF (n = 2, i = 12%) (Appendix B)
PV = $192,100 .797 = $153,104
Calculator: PV =? FV = $192,108 PMT = 0
N=2 %i = 12%
NPV (net present value) $ 23,147 Undertake project!

12-19. Ogden Corporation
a. NPV
1 $ 5,000 $ 4,587
2 5,000 4,208
3 8,000 6,177
4 9,000 6,376
5 10,000 6,499
Present value of outflows (cost) 25,000
b. IRR
Since we have a positive net present value, the internal rate of return must be
larger than 9%. Because of uneven cash flows, we need to use trial and error.
Counting the net present value calculation as the first trial, we now try 11%
for our second trial.
1 $ 5,000 $ 4,505
2 5,000 4,058
3 8,000 5,850
4 9,000 5,929
5 10,000 5,935
A two percent increase in the discount rate has eliminated over one-half of
the net present value so another two percent should be close to the answer.
Year Cash flow Present value @13%
1 $ 5,000 $ 4,425
2 5,000 3,916
3 8,000 5,544
4 9,000 5,520
5 10,000 5,428

The correct answer must fall between 11% and 13%. We
interpolate.
$26,277 PV @ 11% $26,277 PV @ 11%
24,833 PV @ 13% 25,000 (Cost)
$ 1,444 $ 1,277
$1,277
IRR (interpolate ) = 0.11 + (0.02) = 0.11 + 0.884(0.02)
$1,444
= 0.11 + .0177 = 0.1277 = 12.77%
Calculator: Cfi = 25,000; 5,000; 5,000; 8,000; 9,000;

10,000
n=5 %i =?
Compute: IRR = 12.76%
c. The project should be accepted because the NPV is positive and
the IRR exceeds the cost of capital.

12-20. Adventures Club, Inc.
NPV for Project X (Disneyland)
1 $4,000 $ 3,571
2 5,000 3,986
3 4,200 2,989
4 3,600 2,288
Present value of inflows 12,834
Profitability index = = = 1.2834
NPV for Project Y (Film Festivals)

1 $10,800 $ 9,643
2 9,600 7,653
3 6,000 4,271
4 7,000 4,449
Profitability index = = = 1.1825
You should select Project X because it has the higher profitability index.
This is true in spite of the fact that it has a lower net present value. The
profitability index may be appropriate when you have different size
investments. What can be earned on the differential investment of $12,000
(between projects) may be relevant.

12-21. Cablevision, Inc.
a. Reinvestment assumption of NPV
No. of
Year Inflows Rate Periods Future value
1 $10,000 9% 4 $14,116
2 10,000 9% 3 12,950
3 16,000 9% 2 19,010
4 19,000 9% 1 20,710
5 20,000 0 20,000
$86,786
b. Reinvestment assumption of IRR

No. of
Year Inflows Rate Periods Future value
1 $10,000 15% 4 $17,490
2 10,000 15% 3 15,209
3 16,000 15% 2 21,160
4 19,000 15% 1 21,850
5 20,000 0 20,000
$95,709
c. No. However, for investments with a very high IRR, it may be

unrealistic to assume that reinvestment can take place at an equally
high rate. The net present value method makes the more
conservative assumption of reinvestment at the cost of capital.

12-22. Last Century Corporation
a.
Year Inflows Rate # of Periods Future value
1 $12,000 7% 2 $13,739
2 10,000 7% 1 10,700
3 7,200 7% 0 7,200
Terminal value $31,639
PV $25,000
PVIF = = = 0.790 (Appendix B)
FV $31,639
At 3 periods, appendix B suggests a modified IRR of 8%
Calculator: PV = $25,000 FV = $31,639 PMT = 0

N=3 %i = ?
Compute: %i = 8.17%
b.
Calculator: CFi = 25,000; 12,000; 10,000; 7,200 %i = ?
The difference occurs because the traditional IRR assumes reinvestment

at the IRR whereas the modified IRR (MIRR) assumes reinvestment at
the lower cost of capital.

12-23. Music Box Rentals
a.
1 $16,000 10% 2 $19,360
2 12,300 10% 1 13,530
3 15,100 10% 0 15,100
PV $39,000
FV $47,990

N=3 %i = ?
Compute: %i = 7.16%
b.
Calculator: CFi = 39,000; 16,000; 12,300; 15,100 %i = ?
Compute: IRR = 5.6%

the higher cost of capital.

12-24. Caffeine Coffee Company
a.
1 $15,000 12% 2 $18,816
2 12,000 12% 1 13,440
3 9,000 12% 0 9,000
PV $27,000
FV $41,256

N=3 %i = ?
b.
Calculator: CFi = 27,000; 15,000; 12,000; 9,000 %i = ?

the lower cost of capital.

12-25. Oliver Stone and Rock Company
You should rank the investments in terms of IRR.
Project IRR Project Size Total Budget
E 21% $20,000 $ 20,000
B 19.0 25,000 45,000
G 18.0 25,000 70,000
H 17.5 10,000 80,000
D 16.5 25,000 105,000
A 14.0 15,000 120,000
F 11.0 15,000 135,000
C 10.0 30,000 165,000
a. Because of capital rationing, only $80,000 worth of projects can be

accepted. The four projects to accept are E, B, G and H. Projects D and A
provide positive benefits also, but cannot be undertaken under capital
rationing.
b. If Projects B and G are mutually exclusive, you would select Project B in
preference to G. In summary, you would accept E, B, H and D. The last
project would replace G and is of the same $25,000 magnitude.
12-26. Miller Electronics
12-27. Software Systems

a. NPV @ 0% discount rate
Inflows Outflow
$5,800 = (11,000 + $9,000 + $5,800) $20,000
b. 10% discount rate

Year Cash Flow Present Value @ 10%
1 $11,000 $10,000
2 9,000 7,438
3 5,800 4,358
c. 20% discount rate

1 $11,000 $ 9,167
2 9,000 6,250
3 5,800 3,356
Net Present Value $(1,227)

d. Net present value profile
e. Interpolate between 15% and 16%:

1 $11,000 $ 9,565
2 9,000 6,805
3 5,800 3,814
1 $11,000 $ 9,483
2 9,000 6,688
3 5,800 3,716

$20,184 PV @ 15% $20,184 PV @ 15%
19,887 PV @ 16% 20,000 (Cost)
$ 297 $ 184
$184
IRR (interpolatation ) = 0.15 + (0.01) = 0.15 + 0.62(0.01)
$297
= 0.15 + .0062 = 0.1562 = 15.62%
Calculator: Cfi = 20,000; 11,000; 9,000; 5,800
N=3 %i =?

12-28. Zebra Corporation
a. The original cost of the building would be deducted from the Class
3 pool as the lower of sale price or original cost is used when
disposing of an asset. The Class 3 UCC is:
$12,000,000
4,500,000
$ 7,500,000
The present value of the tax shield lost on disposal would be:
Salvage d Tc/ (d + r)
= $4,500,000 .05 .40/ (.05 + .12)
= $4,500,000 .1176471
= $529,412
The $500,000 difference ($5,000,000 $4,500,000) would be a capital gain
for tax purposes. Fifty percent of a capital gain is taxable. Zebras tax on the
taxable capital gain is:
0.50 capital gain T PVIF (n = 1, i = 12%)
= 0.50 $500,000 .4 PVIF (n = 1, i = 12%)
= $89,286
The total present value of tax consequences
= $529,412 + $89,286 = $618,698
b. Class 3 UCC $4,000,000

4,500,000
$ (500,000)
The negative balance of $500,000 is recaptured amortization. This is added
to income in the year of disposal thus increasing tax by:
Income increase T PVIF (n = 1, i = 12%)
= $500,000 0.4 PVIF (n = 1, i = 12%)
= $178,571

Salvage d Tc / (d + r)
= $4,000,000 .05 .40 / (.05 + .12)
= $4,000,000 .1176471
= $470,588
Since there was only $4,000,000 in the pool, that is the basis for calculating
the tax shield lost on disposal.
The tax on the taxable capital gain is $89,286 (as in part a).
= $178,571 + $470,588 + $89,286 = $738,445
c. Class 3 UCC $6,000,000

4,500,000
$1,500,000
The $1,500,000 left over in the Class 3 pool is a terminal loss and
can be written off against income in the year of disposal. The tax
savings is:
Terminal loss T PVIF (n = 1, i = 12%)
= $1,500,000 .4 PVIF (n = 1, i = 12%)
= $535,714
Amount in pool d Tc/ (d + r)
= $6,000,000 .05 .40 / (.05 + .12)
= $6,000,000 .1176471
= $705,882
The tax on the taxable capital gain is $89,286 (as in part a).
= $(535,714) + $705,882 + $89,286 = $259,454

12-29. Capital Cost Allowance
a. The assets will fall under Class 10 (auto equipment) with an

allowable CCA rate of 30%.
b. Year 1
Increase in pools UCC = $95,000
Allowable CCA in 1st year = 1/2 ($95,000 .30)
= $14,250
Year 2
Remaining increase in UCC = $95,000 $14,250
= $80,750
Additional CCA allowable = $80,750 .30
= $24,225
c. The assets would then fall under Class 8 (machinery):

The allowable CCA rate would be 20%.
d. There would be no effects except to the extent of any dollar

amounts realized on disposal.

12-30. Coastal Shipping Corporation
a. The original cost of the vessel would be deducted from the Class 7
pool as the lower of sale price or original cost is used when
disposing of an asset. The Class 7 UCC is:
$2,000,000
1,000,000
$1,000,000
Amount lost from pool (salvage) dTc / (d + r)
= $1,000,000 .15 .40 / (.15 + .10)
= $1,000,000 .240
= $240,000
This is the extent of the tax consequences.
b. Class 3 UCC $ 800,000

1,000,000
$ (200,000)
The negative balance of $200,000 is recaptured amortization. This
is added to income in the year of disposal increasing tax by:
= $200,000 .4 PVIF (n = 1, i = 10%)
= $72,727
= $800,000 .15 .40 / (.15 + .10)
= $800,000 .240
= $192,000
Since there was only $800,000 in the pool, that is the basis for
calculating the tax shield lost on disposal.

= $72,727 + $192,000 = $264,727
c. Class 3 UCC $ 600,000

1,000,000
$(400,000)
The negative balance of $400,000 is recaptured amortization. This

is added to income in the year of disposal thus increasing tax by:

= $400,000 .4 PVIF (n = 1, i = 10%)
= $145,454
= $600,000 .15 .40 / (.15 + .10)
= $600,000 .240
= $144,000
Since there was only $600,000 in the pool, that is the basis for
calculating the tax shield lost on disposal.

= $145,454 + $144,000
= $289,454

12-31. Nexus Corp.
a. The CCA class for aircraft is Class 9, with a CCA rate of 25%.
b. CCA allowable in 1st year

$1,500,000 25% .5 = $187,500
CCA allowable in 2nd year

[$1,500,000 $187,500] 25% = $328,125
c. The CCA class for hangars is class 6, with a CCA rate of 10%.
d. After 10 years the UCC of Class 9 will be(including CCA for the
10th year):
$1,500,000[1 (.25/2) (1 .25)10 1]

= $1,500,000 [(.875) (.75)9]
= $1,500,000 [.0656991]
= $98,549
If the plane is scrapped after the 10th year the consequences are:
Recapture of $200,000
98,549
$101,451
Thus $101,451 will be added to taxable income in the eleventh

year. To determine the taxes payable: multiple by Nexus tax rate.

12-32. Thorpe Corporation
Increased sales $80,000

Increased costs 45,000
Earnings before amortization and taxes 35,000
Amortization ($50,000 .20 1/2) 5,000
Taxes @ 38% 11,400
Earnings aftertax 18,600
Amortization 5,000
Net cash flow $23,600
12-33. Cellular Spacephones Ltd.
a. The investment qualifies for a 35% ITC.

$1,700,000 .35 = $595,000
b. The original cost base is:
$1,700,000 $595,000 = $1,105,000
c. The effects of ITC and CCA are realized at year-end. Therefore:
PV (ITC) = ITC PVIF (n = 1, i = 10%)
= $595,000 PVIF (n = 1, i = 10%)
= $540,909
dT 1 + .5r
PV (CCA) = [C - S PV ] C
r + d 1 + r
.20 .22 1 + .5 .10
= [$1,105,000] = $154,700
.10 + .20 1 + .10
Total combined present value of tax benefits is:

= $540,909 + $154,700 = $695,609

12-34. Medicine Hat Enterprises
a. (Beginning) Tax shield

Year UCC Purchases Sales Rate CCA @ 43%
0 0 $250,000 (.10)(.50) $12,500 $ 5,375
1 $237,500 (.10) 23,750 10,213
2 213,750 (.10) 21,375
300,000 (.10)(.50) 15,000
36,375 15,641
3 477,375 (.10) 47,738 20,527
4 429,637 (.10) 42,964
400,000 (.10)(.50) 20,000
62,964 27,075
This
year 766,673 400,000
Remaining
UCC 366,673 This is a Terminal loss
Resulting in a tax savings of $366,673 0.43 = 157,669
b. As in (a) only no terminal loss.
c. CCA lost from this year forward on $400,000, but $366,673

remains in the pool.
Year Tax shield Present value @ 13%
1 $ 5,375 $ 4,757
2 10,213 7,998
3 15,641 10,840
4 20,527 12,590
5 27,075 14,695
Present value of tax shields $50,880
(without terminal loss)
Terminal loss 157,669 85,576
$166,456

With formula:
PV of impacts on pool:
Year Purchase/ sell PV @ 13%
0 $250,000 $250,000
2 300,000 234,944
4 400,000 245,327
5 (400,000) (217,104)
$513,167
dT 1 + .5r
r + d 1 + r
0.10 0.43 1 + .5 .13
= [$513,167]
0.13 + 0.10 1 + .13
= [$513,167](0.1869565)(0.942478) = $90,421
Difference between formula and year by year calculation:
= $90,421 $50,880 = $39,541
Without formula $766,673 remains in the pool before $400,000
sale.
0.10 0.43 0.10 0.43 1 + .5 .13
PV (CCA) = [$766,673] [$400,000]
0.13 + 0.10 0.13 + 0.10 1 + .13
= [$766,673](.1869565) $400,000(0.17620239)
= $143,335 $70,481 = $72,854
PV = $72,854 PVIF (n = 5, %i = 13)
= $39,542 (rounding difference)
Calculator: PV =? FV = $72,854 PMT = 0
N=5 %i = 13%
Note: The half year rule has already been applied to arrive at the
$766,673.

12-35. Elite Car Rental Corporation
n=2 T = 40% r = 12% d = 40% (class 16)
Expected Aftertax Present Value

Year Event Cash Flow Cash Flow @ 12%
0 Investment $(900,000) $(900,000)
0 Working capital (10,000) ( 10,000)
1-2 Revenue $10,500 30
= 315,000 189,000 319,420
1-2 Expenses $0.14(40,000) 30
= 168,000 100,800 (170,357)
2 Sale (.60) (900,000)
= 540,000 430,485
2 WC recovery 10,000 7,972
0 CCA pool
dT 1 + .5r
r + d 1 + r
0.40 0.40 1 + .5 .12
= [$900,000 $430,485]
0.12 + 0.40 1 + .12
= [$469,515](0.3076923)(0.9464286) = 136,727
NPV = $(185,753)
Elite Car Rental Corporation should not purchase the autos as the
firms value will decrease by $185,753.

12-36. Albert I. Stein Ltd.
n=9 T = 23% r = 13% d = 20% (class 8) ITC = 20%

12-37. Pierce Labs
n=5 T = 44% r = 12% d = 20% (class 8) ITC = 15%
0 Investment $(390,000) $(390,000)
0 Trade- in 85,000 85,000
1 ITC .15(390,000)
= 58,500 52,232
1 Cost savings 99,000 55,440 49,500
2 Cost savings 88,000 49,280 39,286
3 Cost savings 77,000 43,120 30,692
4 Cost savings 66,000 36,960 23,489
5 Cost savings 55,000 30,800 17,477
0 CCA pool
dT 1 + .5r
r + d 1 + r
0.20 0.44 1 + .5 .12
= [$390,000 $85,000]
0.12 + 0.20 1 + .12
= [$305,000](0.2750)(0.94642857) = 79,382
1 ITC from CCA pool
dT 0.20 0.44
PV (CCA) = [- ITC PV ] C = [ $58,500]
r + d 0 .12 + 0 . 20
= [ $58,500](0.2750) = ($16,088) (14,364)
NPV = $(27,306)
Pierce Labs should not purchase the new machine.

Comprehensive Problems
12-38. Ontario Corporation
Tax Net Capital Cash *PV of

Year EBIT - Interest = EBT (46%) = Income + Amort. - Investment = Flow Cash Flow
1 $650,000 $93,750 $556,250 $255,875 $300,375 $140,000 $200,000 $240,375 $ 212,721
2 $700,000 $93,750 $606,250 $278,875 $327,375 $140,000 $200,000 $267,375 $ 209,394
3 $720,000 $93,750 $626,250 $288,075 $338,175 $140,000 $200,000 $278,175 $ 192,789
4 $720,000 $93,750 $626,250 $288,075 $338,175 $140,000 $200,000 $278,175 $ 170,609
5 $690,000 $93,750 $596,250 $274,275 $321,975 $140,000 $200,000 $261,975 $ 142,190
6-10 $700,000 $93,750 $606,250 $278,875 $327,375 $140,000 $ 80,000 $387,375 $ 739,504
$1,667,207
*13% was used since this is an equity only investment.
From the table we see that the present value of the cash flows estimates for the next ten years is $1,667,207. We must now calculate a
value for the cash flows expected more than 10 years hence. To do this we will calculate a terminal value at the end of year 10 and
discount that back to the present.
Terminal value = Annual cash flow/ discount rate
= $387,375/ 0.13
= $2,979,808
Present value = $2,979,808 x PVIF (n = 10, i = 13%)
= $877,817
Therefore, the present value of all future cash flow estimates is $1,667,207 + $877,817 = $2,545,024
Since the market value of the firms shares is $3,000,000 (2,000,000 $1.50/share) there seems little point in Ontario pursuing Target
Firm if management is reasonably confident in the assumptions underlying the analysis.

12-39. Signs For Fields Machinery Ltd.
n = 10 T = 39% r = 15% d = 20%
a. Expected Aftertax Present Value
0 Purchase machine $(65,000) $(65,000)
0 Installation (7,000) ( 7,000)
1-10 Cost savings 17,500 10,675 53,575
10 Salvage 11,500 2,843
0 CCA pool
dT 1 + .5r
r + d 1 + r
0.20 0.39 1 + .5 .15
= [$65,000 + $7000 $2,843]
0.15 + 0.20 1 + .15
= [$69,157](0.22285714)(0.9347826) = 14,407
NPV = $( 1,175)
Signs For Fields Machinery should not purchase the new machine.
b. Sell old machine $ 9,000

Remove from CCA pool: 9,000 (.208323) (1,875)
Net increase in NPV 7,125
Overall the new NPV = $ 5,950
Signs For Fields Machinery should now purchase the new

machine.

c. Expected Aftertax Present Value
0 Installation (7,000) ( 7,000)
1-10 Cost savings 17,500 10,675 55,682
10 Salvage 11,500 3,102
0 CCA pool
dT 1 + .5r
r + d 1 + r
0.20 0.39 1 + .5 .14
= [$65,000 + $7000 $3,102]
0.14 + 0.20 1 + .14
= [$68,898](0.22941176)(0.93859649) = 14,835
NPV = $ 1,619
$1,619 PV @ 14% $1,619 PV @ 14%
(1,175) PV @ 15% 0,000 (Cost)
$2,794 $1,619
$1,619
$2,794
= 0.14 + .0058 = 0.1458 = 14.58%
Profitability index(PI ) = = = 0.984

12-40. H. Improvements Ltd.
n=7 T = 44% r = 14% d = 30%
OuOu Expected Aftertax Present Value
1-7 Operating costs (19,500) (10,920) (46,828)
7 Salvage 6,000 2,398
0.30 0.44 1 + .5 .14
PV (CCA) = [$50,000 $2,398]
0.14 + 0.30 1 + .14
= [$47,602](0.30)(0.93859649) = 13,404
NPV = $(81,026)
Major OuOu Expected Aftertax Present Value

1-7 Operating costs (13,000) (7,280) (31,219)
7 Salvage 8,000 3,197
0.30 0.44 1 + .5 .14
PV (CCA) = [$69,000 $3,197]
0.14 + 0.30 1 + .14
= [$65,803](0.30)(0.93859649) = 18,529
NPV = $(78,493)
The salvage value of $4,500 for the old machine would be
deducted from the CCA pool, but since it is common to both
alternatives it is ignored for the analysis and decision making
purposes.
The Major OuOu should be selected as its NPV is less costly. Our
assumption is that the revenue stream is worthwhile and the least
costly replacement is to be selected.

12-41. Jagged Pill Ltd.
n=8 T = 39% r = 13% d = 20%
1-8 Cash flow 165,000 100,650 482,996
4 Capital upgrade (105,000) (64,398)
8 Salvage 30,000 11,285
0 CCA pool (PV of tax savings)
0.20 0.39 1 + .5 .13
= [$525,000 + $64,398 $11,285]
0.13 + 0.20 1 + .13
= [$578,113](0.2363636)(0.9424779) = 128,785
NPV = $ 33,668
Note: The $60,000 deposit is a sunk cost and is irrelevant for this decision.
b. Expected Aftertax Present Value

1-8 Cash flow 165,000 100,650 451,649
4 Capital upgrade (105,000) (60,034)
8 Salvage 30,000 9,807
0 CCA pool (PV of tax savings)
0.20 0.39 1 + .5 .15
= [$525,000 + $60,034 $9,807]
0.15 + 0.20 1 + .15
= [$575,227](0.22285714)(0.9347826) = 119,833
NPV = ($3,745)

$33,668 PV @ 13% $33,668 PV @ 13%
(3,745) PV @ 15% 0,000 (Cost)
$37,413 $33,668
$33,668
$37,413
= 0.13 + .0180 = 0.1480 = 14.80%
This is an approximation.
c. Profitability index(PI ) = = = 1.057
This is calculated @13%.
d. Jagged Pill should purchase the new machine. Value will increase
by $33,668 (the NPV), the IRR exceeds the cost of capital and the
PI exceeds 1.

12-42. Galaxydoughs Tea Ltd.
n = 12 T = 39% r = 14% d = 30%
0 Capital expenditure($1,000,000) ($1,000,000)
0 Previously purchased equipment
(opportunity cost of forgoing sale)
(300,000) (300,000)
0 Working capital ( 50,000) ( 50,000)
1-6 Cash flow 355,000 216,550 842,091
7-12 Cash flow 425,000 259,250
1,008,137 459,294
1-12 Rent forgone (70,000) 42,700 (241,694)
(opportunity cost)
12 Salvage 55,000 11,416
12 WC Recovery 50,000 10,378
0 CCA pool
PV (CCA)
0.30 0.39 1 + .5 .14
= [$1,000,000 + $300,000 $11,416]
0.14 + 0.30 1 + .14
= [$1,288,584](0.2659091)(0.9385965) = 321,607
NPV = $ 53,092
Galaxydoughs Teas should proceed. Value will be added to the

firm.
b. A changing cost of capital can be handled by discounting with

multiple discount rates appropriate to each year.

12-43. Rinkydink Roller Rinks Ltd.
n=7 T = 44% r = 20% d = 20%
0 Purchase land $(375,000) $(375,000)
0 Working capital (65,000) (65,000)
1-7 Cash flow 60,000 33,600 121,114
7 Sell land 900,000 251,173
7 WC recovery 65,000 18,140
8 Tax on taxable capital gain
[900,000 375,000] 0.50 .44
= $115,500 (26,861)
NPV = $ (76,434)
Note:The tax is paid one year after the realization of the capital
gain (year 8). This assumption is consistent with other treatments
for analysis purposes.
Rinkydink should not purchase the vacant lot. Its purchase will
decrease the value of the firm by $76,434.
If the tax on the capital gain is taken at year 7 its PV is negative
$32,234 and the overall present value is a negative $81,807.

12-44. Clueless Company
n = 15 T = 40% r = 12% (1 .50) = 18% d = 30%

0 Investment $(375,000) $(375,000)
0 Working capital 200,000 60/ 365
= (32,877) (32,877)
1-15 Revenues 200,000 120,000 610,989
1-15 Expenses (85,000) (51,000) (259,670)
15 Salvage 15,000 1,253
15 WC Recovery 32,877 2,746
0 CCA pool
PV (CCA)
0.30 0.40 1 + .5 .18
= [$375,000 $1,253]
0 . 18 + 0.30 1 + .18
= [$373,747](0.250)(0.9237288) = 86,310
NPV =$ 33,751
Clueless should proceed. Value will be added to the firm. This

analysis has used an adjusted discount rate to account for the
higher risk that would be assumed if the project were undertaken.

12-45. Quixotic Enterprises
n = 10 T = 39% r = 20% d = 5%
a.
0 Construct windmills$(400,000) $(400,000)
1-10 Revenues 175,000 106,750 447,546
1-10 Big wind tax (7,500) (4,575) (19,181)
1-10 Rent forgone
(opportunity cost) (5,000) (3,050) (12,787)
5 Capital upgrade (100,000) (40,188)
10 Salvage 25,000 4,038
10 WC Recovery 10,000 1,615
0 CCA pool
PV (CCA)
0.05 0.39 1 + .5 .20
= [$400,000 + $40,188 $4,038]
0.20 + 0.05 1 + .20
= [$436,150](0.078)(0.9166667 ) = 31,185
NPV = $ 2,228

b. IRR Expected Aftertax Present Value
0 Construct windmills$(400,000) $(400,000)
1-10 Revenues 175,000 106,750 432,773
1-10 Big wind tax (7,500) (4,575) (18,547)
1-10 Rent forgone
(opportunity cost) (5,000) (3,050) (12,365)
5 Capital upgrade (100,000) (38,554)
10 Salvage 25,000 3,716
10 WC Recovery 10,000 1,486
0 CCA pool
PV (CCA)
0.05 0.39 1 + .5 .21
= [$400,000 + $38,554 $3,716]
0.21 + 0.05 1 + .21
= [$436,150](0.075)(0.9132231) = 29,783
NPV = ($11,708
$2,228 PV @ 20% $2,228 PV @ 20%
(11,708) PV @ 21% 0,000 (Cost)
$13,936 $2,228
$2,228
$13,936
= 0.20 + .0016 = 0.2016 = 20.16%
c. Profitability index(PI ) = = = 1.005
Just above 1 indicating profitability. (Info from part (a))
d. Dream the impossible dream as it will add value to Quixotic Enterprises.

12-46. Blue Sky Ltd.
n = 10 T = 40% r = 15% d = 30%
0 Sell old machine 27,500 27,500
0 Deinvest WC 5,000 5,000
1-10 Incremental annual(50,000 20,000)
cost savings 30,000 18,000 90,338
10 Incremental salvage(32,000 8,000)
24,000 5,932
10 Reinvest WC (5,000) (1,236)
0 CCA pool
PV (CCA)
0.30 0.40 1 + .5 .15
= [$150,000 $27,500 $5,932]
0.15 + 0.30 1 + .15
= [$116,568](0.266667 )(0.9347826) = 29,058
NPV = $ 6,592
Blue Sky Ltd. should proceed. Value will be added to the firm.
Watch the complete differences between what essentially are two
options.

12-47. Midnight Oil and Gas
n = 10 T = 42% r = 14% d (pipeline) = 20%
d (buildings) = 4%
0 Construct pipeline$(1,000,000) $(1,000,000)
0 Construct buildings (200,000) (200,000)
0 Use land
(opportunity cost) (2,000,000) (2,000,000)
1-10 Cash flow 625,000 362,500 1,890,842
10 Enviro: cleanup (1,200,000) (696,000) (187,742)
10 Salvage 0 0
10 Sell land 4,500,000 1,213,847
11 Tax on capital gain
(4,500,000 500,000)
.50 .42 (840,000) (198,759)
1 Tax on capital gain forgone
(2,000,000 500,000)
.50 .42 315,000 276,316
0 CCA pool
(building ) = [$200,000] 0.04 0.42 1 + .5 .14
0.14 + 0.04 1 + .14
= [$200,000](0.0933333)(0.93859649) = 17,520
( pipeline) = [$1,000,000] 0.20 0.42 1 + .5 .14

0.14 + 0.20 1 + .14
= [$1,000,000](0.2470588)(0.93859649) = 231,889
NPV = $ 43,913
Build the pipeline. Value will be added to the firm.

12-48. St. Bernard Venture
n = 12 T = 40% r = 15% d (machinery) = 30%
d (buildings) = 4%
0 Acquire land $(600,000) $(600,000)
1 Payment building (1,100,000) (956,522)
2 Purchase machinery (175,000) (132,325)
3-12 Revenues 5875,000 525,000 1,992,328
3-12 Expenses (325,000) (195,000) (740,007)
12 Sell building 225,000 42,054
12 Sell machinery 50,000 9,345
12
12 Sell land 600,000 (1.09)
1,687,599 315,424
13 Tax on capital gain (1,687,599 600,000)
.50 .40 (217,520) (35,353)
0 CCA pool
(building ) = [$956,522 $42,054] 0.04 0.40 1 + .5 .15
0.15 + 0.04 1 + .15
= [$914,468](0.0842105)(0.9347826) = 71,986
(machinery ) = [$132,325 $9,345] 0.30 0.40 1 + .5 .15

0.15 + 0.30 1 + .15
= [$122,980](0.2666667 )(0.9347826) = 30,656
NPV = $(2,414)
St. Bernard should not proceed with the venture. Value will not be
added to the firm.

12-49. Marceline Enterprises
n=9 T = 40% r = 11% d = 15%
0 Expansion $(1,000,000) $(1,000,000)
3 Additional capital (200,000) (146,238)
3 Additional WC (10,000) (7,312)
6 Additional capital (200,000) (106,928)
6 Additional WC (10,000) (5,346)
1-2 Revenues 250,000 150,000 256,879
3-5 Revenues 325,000 195,000 386,758
6-9 Revenues 375,000 225,000 414,259
9 Salvage 150,000 58,639
9 WC Recovery 70,000 27,365
0 CCA pool
[1,000,000 + 146,238 + 106,928 58,639] (.15)(.40) 1 + .5(.11) =
.11 + .15 1 + .11
1,194,527 (.2307692) (.9504505) 262,001
NPV = $90,077
Marceline Enterprises should proceed with the amusement park
expansion, as the NPV is positive.

MINI CASES
Aerocomp Corporation
(Methods of Investment Evaluation)
This case places emphasis on comparing the payback method, the internal
rate of return, and the net present value approaches for a series of
investments. As the student progresses through the calculations, the various
advantages and disadvantages of the different approaches become evident.
The reinvestment assumption of a high return project under the internal rate
of return can be highlighted and evaluated. Capital rationing is also
introduced into the case and plays a part in the analysis. Finally, the issue of
reported earnings to shareholders versus sophisticated capital budgeting
techniques is brought up and makes for interesting classroom discussion.
Are shareholders more concerned with next quarters earnings or long-term
benefits?
a. Total Reported Earnings increases for each projects:
Project A Project B Project C Project D

Year 1: $(13,250) $ 29,313 $(60,000) $ 192,206
Year 2: $ (450) $ 87,938 $(16,000) $ 129,846
Year 3: $ 25,494 $146,563 $ 61,640 $ (43,350)
Year 4: $101,003 $234,500 $162,140 $ (62,475)
Year 5: $ 63,315 $322,438 $262,640 $ (94,350)
Total: $176,112 $820,752 $410,420 $ 121,877
We are told in the case that Kay Marsh is sensitive to Aerocomps level of
earnings. Therefore, Project B, with over $820,000 in reported earnings
increases (twice as much as any of the other projects), will be the one that
attracts Kays attention. (She may initially be swayed by the $192,206 that
Project D brings in during the first year, but the losses in years three through
five will probably cause her to reject that alternative quickly.)
Note: Projects A and C both produce earnings decreases for the first two
years. We would suspect that if Emily thinks that either of these two should

be selected (on the basis of some other ranking method, such as NPV), she
had better have some convincing arguments prepared!

b. Payback Period, IRR, and NPV of each alternative:
Project A Project B Project C Project D

Payback Period: 4 years 5 Years 5 Years 2 Years
IRR: 14.08% 7.18% 11.95% 12.48%
NPV @ 10%: $39,971 ($63,848) $52,192 $20,609
(Students may get slightly different values due to rounding.)

Note: A few students may question the fact that Project Bs cost has not
been completely recovered in the five-year period shown, as the cost of the
other projects has been. Therefore, they will claim, we are not using the
proper time frame for our comparison of the projects. Of course, they are
correct, and deserve extra points for their astute observation. In the case,
Project Bs amortization, or depreciation, was limited on purpose to
highlight the effect of amortization on reported income and cash flows.
c.
1. According to the Payback period, Project D should be selected. The
initial investment of $510,000 is recovered in the second year.
2. The chief disadvantage of the Payback Period is obvious at once: the
method ignores cash flows occurring after the payback period. In this
case such an omission is disastrous, since Project Ds reported
earnings and cash flows fall off significantly after the payback period
and never recover. Another disadvantage of the Payback Period is that
it does not consider the timing of cash flows during the payback
period.
3. In general, the Payback Period should not be used. However, it is used
from time to time because it is easy to understand, and because it
favors projects that pay off quickly. This can be an important factor in
some fast-paced industries where a quick return is important. The
Payback Period may have some justification as a backup method, but
not as the primary analytical tool.

d.
1. According to the IRR method, Project A should be chosen. It returns
nearly two percent more than the closest competing project.
2. Remember, that to achieve the IRR during a projects life, the
projects cash inflows must be reinvested at the IRR rate. This may be
difficult or impossible to accomplish when high IRRs are involved.
(Suppose you were Aerocomps financial manager, and you were
getting the cash flows from Project A. What would you do with them:
Pay dividends? Put them in a money market account at? You might
encounter a great deal of difficulty locating an investment that would
pay you back the IRR rate of 14.08%). As a matter of interest (no pun
intended) if Project As cash flows were reinvested at 7% annually
instead of the IRR rate of 14.08%, the projects total return for the
five-year period would drop to 11.84%.
3. Another disadvantage of the IRR method is that it does not give any
consideration to project size. For example, the IRR method would
select a project that returned $10 on a $1 investment over any of the
projects in this case, even though the dollar return to the firm was only
$9. This is not a problem when all projects with IRRs over the cost of
capital can be selected, but when the projects are mutually exclusive,
or when capital rationing is in effect (as it is in this case), the IRR
method may lead the firm to make an incorrect choice.
(Note: It is important to avoid confusion on this point. The IRR and
NPV methods will both accept and reject the same investments, but
they will not give them the same ranking. In this case, projects A, C,
and D are all acceptable per IRR and NPV. However, the IRR method
would choose projects A, D, and C, in that order, while the NPV
method would choose C, A, and D.)
4. If the size of Aerocomps capital budget were not limited, the IRR
method would accept projects A, C, and D. Project B, with an IRR of
7.18%, almost 3% less than the cost of capital, would be rejected.

e.
1. According to the NPV method, Project C, with an NPV of over
$52,000, will be chosen. It will add to the present value of the firm
over $12,000 more than the next best project. Of course, under the
IRR, Project A will be selected. Actually Project C is only a third
place finisher under the IRR method.
2. If the size of Aerocomps capital budget were not limited, the NPV
method would accept projects A, C, and D. Project B, with an NPV of
negative $63,848, would be rejected anyway. Note that both the NPV
and IRR methods rejected project B. The return is less than the cost of
capital.
3. The likely selection is Project C because of its high net present value.
This is partly attributable to the fact that only one project can be
selected. Had there not been capital limitations, one might put more
emphasis on the IRR or use a profitability index approach. Of course,
some instructors might select Project A as being preferable using
other criteria, and that is fine. There may be some interesting
opportunities for a classroom debate or discussion on these points.
f.
1. Profitability index =
Project A [39,971 + 300,000]/ 300,000 = 1.133
Project B [- 63,848 + 700,000]/ 700,000 = 0.909
Project C [52,192 + 800,000]/ 800,000 = 1.065
Project D [20,609 + 510,000]/ 510,000 = 1.040
2. The profitability index suggests project A with the highest relative

profitability. However, project A adds the most value to the firm.
Notice that projects A and D together, at roughly the same initial
investment as C, provide a higher combined NPV.

Galaxy Systems, Inc.
(Divisional Cost of Capital)
Purpose: The case combines risk analysis with discount rate considerations. To
emphasize how many multidivisional corporations operate, the case actually gets into the
topic of divisional hurdle rates. The student is able to see how different divisions in a
corporation might have different required rates of return based on their risk exposure. In
this particular case, a key risk measure for the consideration is beta. (Only observe how
they might be used). Calculations related to net present value and internal rate of return
are purposely simple to emphasize more conceptual items. (IRRs can be found as exact
values from Appendix D after only one calculation, if tables are preferred).
Emphasis can be made on how financial decisions are made in a corporate culture.
This case draws on material from many of the capital budgeting chapters.
Proposal A
NPV (10% discount rate for the auto airbags production division)
Cost $2,355,600
Calculator: PV =2,355,600 FV = 0 PMT = $400,000

n = 10 %i = ?
Compute: %i = 11.00
Investment $2,355,600
IRR = = = 5.889 (App. D) n = 10
Annuity $400,000
IRR = 11%
PVA = A PVIFA (n = 10, %i = 10) (Appendix D)
PVA = $400,000 6.145 = $2,258,000

n = 10 %i = 10%
Compute: PV = $2,457,827
Present value of inflows $2,457,827

Cost 2,355,600
Net present value $ 102,227

Proposal B
NPV (15% discount rate for the aerospace division)
Cost $2,441,700

n = 10 %i = ?
Compute: %i = 13.00
$2,441,700
IRR = = 5.426 (App. D) n = 10
$450,000
IRR = 13%
PMT = $450,000, n = 10, %i = 15
Present value of inflows = $450,000 5.019 = $2,258,550

n = 10 %i = 15%
Compute: PV = $2,258,446

Cost 2,441,700
Net present value ($ 183,254)
Proposal C
NPV (10% discount rate for the auto airbags production division)
Cost $145,680
Calculator: PV =145,680 FV = 0 PMT = $15,000

n = 15 %i = ?
Compute: %i = 6.00
$145,680
IRR = = 9.712(App. D) n = 15
$ 15,000
IRR = 6%

PMT = $15,000, n = 15, %i = 10
Present value of inflows = $15,000 7.606 = $114,090

n = 15 %i = 10%
Present value of inflows $ 114,091

Cost 145,680
Net present value ($ 31,589)
Proposal D
NPV (15% discount rate for the aerospace division)
Cost $1,262,100

n=8 %i = ?
Compute: %i = 17.00
$1,262,100
IRR = = 4.207( App.D) n=8
$300,000
IRR = 17%
PMT = $300,000, n = 8, %i = 15
Present value of inflows = $300,000 4.487 = $1,346,100

n=8 %i = 15%
Compute: PV = $1,346,196

Cost 1,262,100
Net present value $ 84,096

a. Proposal A should be accepted
IRR > discount rate (11% > 10%)
NPV is positive $102,227
Proposal B should be rejected
IRR < discount rate (13% < 15%)
NPV is negative ($183,254)
Proposal C should be rejected
IRR < discount rate (6% < 10%)
NPV is negative ($31,589)
Proposal D should be accepted
IRR > discount rate (17% > 15%)
NPV is positive $84,096
b. While the decisions related to Proposals A and B appear to be straightforward,
Proposals C and D require further discussion.
Proposal C has a negative net present value and the internal rate of return of 6%
is well below the required rate of return of 10%. Nevertheless, it calls for the
development of special equipment to be used in the disposal of environmentally
harmful waste material created in the manufacturing process. Given tougher
environmental laws, the project may have to be accepted. We are not told
whether the installation is mandatory under the law, but there probably is
adequate motivation to move forward with the project. Of course, if the
installment of the equipment is required by law, then Galaxy must move
forward regardless of the numbers.
Proposal D has a positive net present value and the internal rate of return of 17
percent is well above the required rate of return of 15 percent for the division.
However, the proposal appears to have even greater risk than projects normally
undertaken in the aerospace division. While the high required rate of return for
this division is supposed to cover the risk exposure of dealing in U.S.
government contracts, Project D calls for the development of a microelectric
control system for fighter jets that are still in the design stage. Even if the
microelectric systems are successfully developed, there may not be a need for
them if the other aerospace company cannot successfully develop fighter jets.
Furthermore, the target market for the jets is in underdeveloped countries,
which increases the uncertainty associated with this project. In the final
analysis, top management might require an anticipated return of 20 percent or
more to take on this highly speculative project.

c. The $300,000 that has already been spent on the initial research for Proposal B
(radar surveillance equipment) is a sunk cost. The money has already been
spent and should have no influence on subsequent decisions. Sometimes in the
real world, egos get in the way of corporate decisions, and division heads (or
other executives) push hard for the continuance of projects that they spent funds
on to explore; but that is not justification to continue on. This is somewhat like
buying stock in an underperforming company in the stock market. Sometimes,
you just have to take your losses.
Of course, even if we considered the $300,000 that had already been spent, it
would raise the total cost of the project and make it even less economical.
Further overall comments:

Companies that use divisional required rates of return often do have difficulties in
finding betas for firms that produce products comparable to a division. That is,
finding a pure play comparison is difficult. Therefore, using the average beta for
an entire industry may be the next best alternative. For example, if a division
produces machine tools, its beta may be inferred from the entire machine tool
industry rather than from a given firm in the industry.

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Practice Problems Ch12 PDF

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Practice Problems Chapter 12

12-1. Corporate cash flow

12-2. Corporate cash flow

Foundations of Fin. Mgt. S-364 8/E Cdn. Block, Hirt, Short

b. Seems like a pretty good return, but we need a criteria for

12-4. Pluto Corporation

Foundations of Fin. Mgt. S-365 8/E Cdn. Block, Hirt, Short

12-6. Pluto Corporation

Year EBAT Amortization EBT Taxes EAT

Foundations of Fin. Mgt. S-366 8/E Cdn. Block, Hirt, Short

12-9. Payback versus NPV

NPV for Investment Y

Foundations of Fin. Mgt. S-367 8/E Cdn. Block, Hirt, Short

12-11. Diaz Camera Company

Foundations of Fin. Mgt. S-368 8/E Cdn. Block, Hirt, Short

12-12. Hand Salsa

Foundations of Fin. Mgt. S-369 8/E Cdn. Block, Hirt, Short

Foundations of Fin. Mgt. S-370 8/E Cdn. Block, Hirt, Short

12-16. Aerospace Dynamics

Foundations of Fin. Mgt. S-371 8/E Cdn. Block, Hirt, Short

12-18. Skyline Corporation

Foundations of Fin. Mgt. S-372 8/E Cdn. Block, Hirt, Short

Foundations of Fin. Mgt. S-373 8/E Cdn. Block, Hirt, Short

Calculator: Cfi = 25,000; 5,000; 5,000; 8,000; 9,000;

Foundations of Fin. Mgt. S-374 8/E Cdn. Block, Hirt, Short

NPV for Project Y (Film Festivals)

Foundations of Fin. Mgt. S-375 8/E Cdn. Block, Hirt, Short

b. Reinvestment assumption of IRR

c. No. However, for investments with a very high IRR, it may be

Foundations of Fin. Mgt. S-376 8/E Cdn. Block, Hirt, Short

Calculator: PV = $25,000 FV = $31,639 PMT = 0

The difference occurs because the traditional IRR assumes reinvestment

Foundations of Fin. Mgt. S-377 8/E Cdn. Block, Hirt, Short

Calculator: PV = $39,000 FV = $47,990 PMT = 0

The difference occurs because the traditional IRR assumes reinvestment

Foundations of Fin. Mgt. S-378 8/E Cdn. Block, Hirt, Short

Calculator: PV = $27,000 FV = $41,256 PMT = 0

The difference occurs because the traditional IRR assumes reinvestment

Foundations of Fin. Mgt. S-379 8/E Cdn. Block, Hirt, Short

a. Because of capital rationing, only $80,000 worth of projects can be

12-26. Miller Electronics

12-27. Software Systems

b. 10% discount rate

c. 20% discount rate

Foundations of Fin. Mgt. S-381 8/E Cdn. Block, Hirt, Short

e. Interpolate between 15% and 16%:

Foundations of Fin. Mgt. S-382 8/E Cdn. Block, Hirt, Short

Foundations of Fin. Mgt. S-383 8/E Cdn. Block, Hirt, Short

b. Class 3 UCC $4,000,000

Foundations of Fin. Mgt. S-384 8/E Cdn. Block, Hirt, Short

c. Class 3 UCC $6,000,000

Foundations of Fin. Mgt. S-385 8/E Cdn. Block, Hirt, Short

a. The assets will fall under Class 10 (auto equipment) with an

c. The assets would then fall under Class 8 (machinery):

d. There would be no effects except to the extent of any dollar

Foundations of Fin. Mgt. S-386 8/E Cdn. Block, Hirt, Short

b. Class 3 UCC $ 800,000

Foundations of Fin. Mgt. S-387 8/E Cdn. Block, Hirt, Short

c. Class 3 UCC $ 600,000

The negative balance of $400,000 is recaptured amortization. This

Income increase T PVIF (n = 1, i = 10%)

The total present value of tax consequences

Foundations of Fin. Mgt. S-388 8/E Cdn. Block, Hirt, Short