06 Aug LP 7 Assignment
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:
_____________________________________________
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
_____________________________________________
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:
________________________
Year Cash Flow
1…………… $15,000
2…………… 20,000
3…………… 25,000
4…………… 10,000
5…………… 5,000
________________________
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?
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