Question

Bottoms Up Diaper Service is considering the purchase of a new industrial washer, It can Durchase the washer for $1.800 and sell its old washer for $600. The new washer will last for 6 vears and save $500 a year in expenses. The opportunity cost of capital is 19% , and the firm's tax rate is 40% a. If the firm uses straight-line depreciation to an assumed salvage value of zero over a 6-year life. what is the annual operating cash flow of the project in years 0 to 67 The new washer will in fact have zero salvage value after 6 years, and the old washer is fully depreciated. (Negative amount should be indicated by a minus sign.) Annual operating cash flow in year 0 Annual operating cash flow in years 1 to 6 b. What is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV c. What is NPV if the firm uses MACRS depreciation with a 5-year tax life? Use the MACRS depreciation schedule. (Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV d. What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) IRR

Answer 1

строго - C D E F G H 1 2 3 4 5 6 H188 foc =SUM(B187:H187) B 169 Estimating Initial Outlay 170 Year 0 171 Investments 172 Cost of New Machine 1,800 Less - Sale proceeds from Old Machine 360 173 after tax 174 175 a.1 Operating Cash flow in Year 0 1,440 176 177 Operations 178 Savings in expense 179 Depreciation - SLM 180 EBT 181 Taxes 182 Net Income 183 Add Back Depreciation 184 a.2. Total Operating Cashflow in Year 1-6 185 Free Cash Flows (1,440) 186 Present Value Factor @19% 187 Present Value of Casflow (1,440) 188 b. NPV 189 500 (300) 200 (80) 500 (300) 200 (80) 120 300 420 420 0.8403 353 500 (300) 200 (80) 120 300 420 420 0.7062 297 500 (300) 200 (80) 120 300 420 420 0.5934 249 120 300 420 420 0.4987 209 500 (300) 200 (80) 120 300 420 420 0.4190 176 500 (300) 200 (80) 120 300 420 420 0.3521 148 (8)

F DMliyOLL 1 .00 .0 Forr Format Painter Clipboard A206 Alignment Number Font fx c.1 Depreciation using MACRS C D E F G H 205 206 C.1 Depreciation using MACRS Year 207 Depreciation Rate Depreciation 0 208 209 210 Opening Balance 1,800 1,800 1,440 864 518 311 104 Closing Balance 1,800 1,440 864 518 211 20.00 32.00 19.20 11.52 11.52 5.76 360 576 346 207 207 104 ? 311 ܩ 104 ܗ 0 2 3 4 5 6 1,440 212 213 214 215 216 Revised NPV 217 Year 218 1 Operating Cash flow in Year O 219 Operations 220 Savings in expense 221 Depreciation - MACRS 222 EBT 223 Taxes 224 Net Income 225 Add Back Depreciation 226 2. Total Operating Cashflow in Year 1 - 6 227 Free Cash Flows 228 Present Value Factor @ 19% 229 Present Value of Casflow 230 c.2 NPV 231 500 (576) (76) 500 (346) 154 (62) 93 (76) 500 (360) 140 (56) 84 360 444 444 0.8403 373 500 (207) 293 (117) 176 207 383 383 0.4987 191 500 (207) 293 (117) 176 207 383 383 0.4190 160 576 500 (104) 396 (159) 238 104 341 341 0.3521 120 18 438 (1,440) 1 (1,440) 500 500 0.7062 353 0.5934 260

Clipboard Font Alignment H210 B C D E 190 d. Calculation of IRR 191 192 IRR = Lower Rate + (Lower Rate NPV*Difference in rates)/(Lower Rate NPV-Higher Rate NPV) 193 194 Let us calculate NPV at Discount rate of 15% 0.15 Present Present Year Value Factor Cash Flow Value 195 @ 15% 196 1.000 (1,440) (1,440) 197 0.870 420 365 0.756 420 199 0.658 420 276 200 0.572 420 240 201 0.497 420 209 0.432 420 182 203 NPV 149 204 IRR 18.80 198 318 202

Number Styles Cells Clipboard A173 Font Alignment fx Less - Sale proceeds from Old Machine after tax 169 Estimating Initial Outlay 170 Year 171 Investments 172 Cost of New Machine 1800 Less - Sale proceeds from Old Machine 173 after tax I=600*60% 174 175 a.1 Operating Cash flow in Year 0 =B172-8173 176 177 Operations 178 Savings in expense 179 Depreciation - SLM 180 EBT 181 Taxes 182 Net Income 183 Add Back Depreciation 184 a.2. Total Operating Cashflow in Year 1 - 6 0 185 Free Cash Flows --B175 186 Present Value Factor @ 19% 187 Present Value of Casflow =B186*B185 188 b. NPV 500 500 500 500 500 500 --1800/6 --1800/6 --1800/6 =-1800/6 =-1800/6 --1800/6 =SUM(C178:C179) =SUM(D178:D179) =SUM(E178:E179) =SUM(F178:F179) =SUM(G178:6179) =SUM(H178:H179) --C180*40% --D180*40% --E180*40% --F180*40% --G180*40% --H180*40% =C180+C181 =D180+D181 -E180+E181 =F180+F181 =G180+G181 =H180+H181 --C179 --D179 --E179 =-F179 --G179 --H179 =SUM(C182:C183) =SUM(D182:D183) =SUM(E182:E183) =SUM(F182:F183) =SUM(G182:G183) ESUM(H182:H183) =SUM(C184:C184) =SUM(D184:D184) =SUM(E184:E184) SUM(F184:F184) =SUM(G184:G184) =SUM(H184:H184) =1/(1+0.19)^1 =1/(1+0.19)^2 =1/(1+0.19)^3 =1/(1+0.19)^4 =1/(1+0.1945 =1/(1+0.19)^6 =C186*C185 =D186*D185 =E186*E185 =F186*F185 =G186*G185 =H186*H185 =SUM(B187:H187) 189

Alignment Number Clipboard A214 Font for 6 - 205 206 c.1 Depreciation using MACRS Opening Balance Depreciation Rate Depreciation Closing Balance 20 =B172 =E208 =E209 =E210 =E211 =E212 I=E213 19.2 11.52 11.52 5.76 =$B$208*C209% =$B$208*C210% =$B$208*0211% =$B$208*0212% =$B$208*C213% =$B$208*C214% =8208-D208 =8209-D209 =8210-D210 =8211-0211 =B212-D212 =B213-D213 =B214-D214 =B175 207 Year 2080 2091 210 2 2113 212 4 213 5 21416 215 216 Revised NPV 217 Year 218 1 Operating Cash flow in Year 0 219 Operations 220 Savings in expense 221 Depreciation - MACRS 222 EBT 223 Taxes 224 Net Income 225 Add Back Depreciation 226 2. Total Operating Cashflow in Year 1-6 227 Free Cash Flows 228 Present Value Factor @19% 229 Present Value of Casflow 230 c.2 NPV 231 OOOOOO 500 500 500 --D209 --D210 --0211 SUM(C220 C221) SUM(D220:D221) SUM(E220:E221) --C222*40% --E222*40% =C222+C223 =D222+D223 =E222+E223 --C221 --D221 --E221 -SUM(C224:C225) SUM(D224:D225) =SUM(E224E225) =SUM(C226:C226) =SUM(D226:D226) =SUM(E226:E226) =1/(1+0.19)^1 =1/(1+0.19)^2 =1/(1+0.19)^3 =C228*C227 =D228*0227 =E228 'E227 500 500 --D212 --D213 =SUM(F220:F221) =SUM(G220:4221) --F222*40% --G222*40% =F222-F223 =G222+G223 --F221 --G221 =SUM(F224:F225) =SUM(G224:225) =SUM(F226:F226) =SUM(G226:G226) =1/(1+0.19)^4 =1/(1+0.19)^5 =F228 F227 =G228*6227 500 --D214 =SUM(H220:H221) --H222*40% =H222+H223 --H221 SUM(H224:H225) SUM(H226:H226) =1/(1+0.19)^6 =H228*H227 =SUM(B229:H229) 0 =-B218 =B228*8227 227

Alignment Number Styles Clipboard A214 Font Fax 6 - D 190 d. Calculation of IRR 191 192 IRR = Lower Rate +(Lower Rate NPV*Difference in rates)/(Lower Rate NPV-Higher Rate NPV) 193 194 Let us calculate NPV at Discount rate of 15% 0.15 Year Present Value Factor @ 15% Cash Flow Present Value 195 1960 197 1 1982 1993 2004 2015 2026 203 NPV 204 IRR 205 =B185 =1/(1+$D$194)^A197 =C185 =1/(1+$D$194) A198 =D185 =1/(1+$D$194) A199 =E185 =1/(1+$D$194) A200 =F185 =1/(1+$D$194)^A201=G185 =1/(1+$D$194)^A202 =H185 =C196*$B196 =C197*$8197 =C198*$8198 =C199*$B199 =C200*$B200 =C201*$8201 =C202*$B202 -SUM(D196:D202) =(15+((D203)* (19-15))/(D203-H188))