Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
Chapter 10 Developing Project Cash Flows Generating Net Cash Flows 10.1 The income and cash flow statements are as below: 0
1
2
3
4
5
6
Income Statement Rev enues Expenses O&M Depreciation
$35,000
$35,000
$35,000
$35,000
$35,000
$35,000
$12,000 $13,000
$12,000 $20,800
$12,000 $12,480
$12,000 $7,488
$12,000 $7,488
$12,000 $3,744
Taxable In Income Income Taxes (40%)
$10,000 $4,000
$2,200 $880
$10,520 $4,208
$15,512 $6,205
$15,512 $6,205
$19,256 $7,702
$6,000
$1,320
$6,312
$9,307
$9,307
$11,554
$6,000 $13,000
$1,320 $20,800
$6,312 $12,480
$9,307 $7,488
$9,307 $7,488
$11,554 $3,744
Net Income Cash Flow Statement Operating Activities: Net Income Depreciation Investment Activities Inv estment Salv age Gains Tax
Net Ca Cash Fl Flow PW (15 %)
($65,000) $0 $0 ($65,000) $5,170.15
$19,000
$22,120
$18,792
$16,795
$16,795
$15,298
Since NPW(15%) > 0, This machine should be bought.
10.2 Investment in industrial robot: 0
1
2
3
4
5
6
7
Income Statement
Revenues Expenses O&M Depreciation Taxable In I ncome Income Ta Taxes (3 (35%) Net Income
$150,000
$150,000
$150,000
$150,000
$150,000
$150,000
$150,000
$42,000
$67,200
$40,320
$24,192
$24,192
$12,096
$0
$108,000 $37,800
$82,800 $28,980
$109,680 $38,388
$125,808 $44,033
$125,808 $44,033
$137,904 $48,266
$150,000 $52,500
$70,200
$53,820
$71,292
$81,775
$ 8 1 ,7 7 5
$89,638
$97,500
$70,200 $42,000
$53,820 $67,200
$71,292 $40,320
$81,775 $24,192
$ 8 1 ,7 7 5 $24,192
$89,638 $12,096
$97,500 $0
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities Investment Salvage Gains Tax Net Cash Flow PW (15 %)
($210,000) $60,000 ($21,000) ($210,000) $112,200 $261,029.59
$121,020
$111,612
$105,967
$105,967
$101,734
$136,500
Page | 1
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.3 The income and cash flow statements are as below: 0
1
2
3
4
5
Income Statement
Revenues Expenses: O&M Depreciation
$3,833,542
$3,833,542
$3,833,542
$3,833,542
$3,833,542
$435,000 $294,872
$485,000 $307,692
$535,000 $307,692
$585,000 $307,692
$635,000 $294,872
Taxable In Income Income Taxes (35%)
$3,103,670 $1,086,285
$3,040,850 $1,064,297
$2,990,850 $1,046,797
$2,940,850 $1,029,297
$2,903,670 $1,016,285
Net Incom e
$2,017,386
$1,976,552
$1,944,052
$1,911,552
$1,887,386
$2,017,386 $294,872
$1,976,552 $307,692
$1,944,052 $307,692
$1,911,552 $307,692
$1,887,386 $294,872
Cash Flow Statement Statement
Operating Activities: Net Incom e Depreciation Investment Activities: Inve Invest stme ment nt (Bui (Build ldin ing) g) Investment(Land) Salvage (Building) Salvage (Land) Gains Tax Net Cash Flow PW (15 %)
Ann ual rat e
($12 ($12,,000, 000,00 000) 0) ($3,500,000) $13,500,000 $3,500,000 ($1,054,487) ($15,500,000) $2,312,257 $0.00
$76,670.84
$2,284,244
$2,251,744
$2,219,244
$18,127,770
per apartment
10.4 A local delivery company 0 Income Statement Rev enues Expenses O&M Depreciation
1
2
$10 , 00 0
$1 0 , 0 00
$3 , 00 0 $3 , 000
$ 3 , 000 $2 , 400
Tax able Incom e Incom e Tax es (40%)
$4 , 000 $1,600
$4 , 6 00 $ 1 , 84 0
Net Incom e
$2 , 4 00
$2 , 760
$2 , 4 00 $3 , 000
$2 , 760 $2 , 400
Cash Cash Fl ow Statement Operating Activities: Net Incom e Depreciation Investment Activities Inv estm ent Sal v age Gai ns Tax
Net Cash Flow PW (15 %)
($15,000) $1 0 , 000 ($160) ($15,000) $ 1 , 037 . 81
$5 , 400
$15,000
Page | 2
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.3 The income and cash flow statements are as below: 0
1
2
3
4
5
Income Statement
Revenues Expenses: O&M Depreciation
$3,833,542
$3,833,542
$3,833,542
$3,833,542
$3,833,542
$435,000 $294,872
$485,000 $307,692
$535,000 $307,692
$585,000 $307,692
$635,000 $294,872
Taxable In Income Income Taxes (35%)
$3,103,670 $1,086,285
$3,040,850 $1,064,297
$2,990,850 $1,046,797
$2,940,850 $1,029,297
$2,903,670 $1,016,285
Net Incom e
$2,017,386
$1,976,552
$1,944,052
$1,911,552
$1,887,386
$2,017,386 $294,872
$1,976,552 $307,692
$1,944,052 $307,692
$1,911,552 $307,692
$1,887,386 $294,872
Cash Flow Statement Statement
Operating Activities: Net Incom e Depreciation Investment Activities: Inve Invest stme ment nt (Bui (Build ldin ing) g) Investment(Land) Salvage (Building) Salvage (Land) Gains Tax Net Cash Flow PW (15 %)
Ann ual rat e
($12 ($12,,000, 000,00 000) 0) ($3,500,000) $13,500,000 $3,500,000 ($1,054,487) ($15,500,000) $2,312,257 $0.00
$76,670.84
$2,284,244
$2,251,744
$2,219,244
$18,127,770
per apartment
10.4 A local delivery company 0 Income Statement Rev enues Expenses O&M Depreciation
1
2
$10 , 00 0
$1 0 , 0 00
$3 , 00 0 $3 , 000
$ 3 , 000 $2 , 400
Tax able Incom e Incom e Tax es (40%)
$4 , 000 $1,600
$4 , 6 00 $ 1 , 84 0
Net Incom e
$2 , 4 00
$2 , 760
$2 , 4 00 $3 , 000
$2 , 760 $2 , 400
Cash Cash Fl ow Statement Operating Activities: Net Incom e Depreciation Investment Activities Inv estm ent Sal v age Gai ns Tax
Net Cash Flow PW (15 %)
($15,000) $1 0 , 000 ($160) ($15,000) $ 1 , 037 . 81
$5 , 400
$15,000
Page | 2
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.5 Investment in an answering device: •
Depreciation: It is assumed that the building building will be placed placed in service in January during the the first project year. Then, it will be depreciated based on 391 11.5 year MACRS. Using × = 0.02457 due to mid-month convention at end 39 12 of year 5, the book value for the building would be $436,965.
•
Gains and losses: Property (asset) Land Building Equipm ent
•
Cost Salv age Book Gains Gains base v alue v alue (losses) taxes $100,000 $115,000 $100,000 $115,000 $6,000 $500,000 $575,000 $436,965 $138,035 $55,214 $500,000 $50,000 $133,873 ($ ($83 83,87 ,873) 3) ($33,5 ($33,549 49))
Project cash flows 0
Income Statement Revenues (savings) Expenses: O&M costs Depreciation Depreciation : Bu Building Eq E quipment Taxable Income Income Taxes Net Income Cash Flow Statement Operating Activities: Net Income Depreciation Investment Activities: Land Building Machines Gains Tax La Land Bu Building Eq Equipment Net Cash Flow
1
2
3
4
5
$2,500,000
$ 2 , 5 0 0 ,0 0 0
$2,500,000
$ 2 ,5 0 0 , 0 0 0
$2,500,000
1 , 2 8 0, 0 0 0
1 ,2 8 0 , 0 0 0
1,280,000
1,280,000
1,280,000
1 2 ,2 8 7 7 1 ,4 5 0 1,136,264 454,505
12,821 122,450 1,084,730 433,892
12,821 87,450 1,119,730 447,892
1 2 ,8 2 1 6 2 ,4 5 0 1 , 1 4 4 ,7 3 0 4 5 7 ,8 9 2
12,287 22,325 1 ,1 8 5 , 3 8 9 474,155
$681,758
$650,838
$671,838
$ 6 8 6 ,8 3 8
$711,233
$681,758 $83,737
$650,838 $135,271
$671,838 $ 1 0 0 ,2 7 1
$ 6 8 6 ,8 3 8 $75,271
$711,233 $34,612
($100,000) ($500,000) ($500,000)
115000 575000 50000 ($6,000) ($55,214) $ 3 3 ,5 4 9
($1,100,000)
$765,495
$786,108
$ 7 7 2 ,1 0 8
$ 7 6 2 ,1 0 8
$1,458,180
Page | 3
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.6 Investment in a new trench excavator: 0
1
2
3
4
5
Income Statement
Revenues Expenses Required annual digging(ft) Number of hours to operate Operating cost (@50/hr) Depreciation
6400 400 $20,000 $50,000
6400 6400 6400 400 400 457 $20,000 $20,000 $22,857 $80,000 $48,000 $28,800
6400 533 $26,667 $14,400
Taxable Income Income Taxes (35%)
($70,000) ($100,000) ($68,000) ($51,657) ($41,067) ($24,500) ($35,000) ($23,800) ($18,080) ($14,373)
Net Income
($45,500) ($65,000) ($44,200) ($33,577) ($26,693)
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities Inv estment Salv age Gains Tax Net Cash Flow
($45,500) ($65,000) ($44,200) ($33,577) ($26,693) $50,000 $80,000 $48,000 $28,800 $14,400 ($250,000) $60,000 ($10,920) ($250,000) $4,500
$15,000
$3,800 ($4,777) $36,787
Page | 4
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.7 0
1
2
3
4
5
Income Statement
Revenues Expenses Software development O&M Depreciation
$72,000 $72,000 $72,000 $72,000 $72,000 $20,000 $15,000 $15,000 $15,000 $15,000 $15,000 $20,800 $33,280 $19,968 $11,981 $5,990
Taxable Income Income Taxes (35%)
$16,200 $23,720 $37,032 $45,019 $51,010 $5,670 $8,302 $12,961 $15,757 $17,853
Net Income
$10,530 $15,418 $24,071 $29,262 $33,156
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities Investment Salvage Gains Tax Net Cash Flow PW(13%)
$10,530 $15,418 $24,071 $29,262 $33,156 $20,800 $33,280 $19,968 $11,981 $5,990 ($104,000) 0 $4,193 ($104,000) $31,330 $48,698 $44,039 $41,243 $43,340 $41,202.89
Page | 5
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.8 0
1
2
3
4
5
Income Statement
Revenues Expenses O&M Depreciation
$20,720
$20,720
$20,720
$20,720
$20,720
$15,000 $3,700
$15,000 $5,920
$15,000 $3,552
$15,000 $2,131
$15,000 $1,066
Taxable Income Income Taxes (40%)
$2,020 $808
($200) ($80)
$2,168 $867
$3,589 $1,436
$4,654 $1,862
Net Income
$1,212
($120)
$1,301
$2,153
$2,793
$1,212 $3,700
($120) $5,920
$1,301 $3,552
$2,153 $2,131
$2,793 $1,066
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities Investment Salvage Gains Tax Net Cash Flow
($18,500) $1,850 $112 ($18,500) ($10.74)
PW(12%) Decision:
$4,912
$5,800
$4,853
$4,284
$5,821
Reject
11.98%
IRR
10.9 0
1
2
3
4
5
6
Income Statement
Rev enues Expenses Labor & Mat'l Costs Depreciation
$320,000 $320,000 $320,000 $320,000 $320,000 $320,000 $130,000 $130,000 $130,000 $130,000 $130,000 $130,000 $30,000 $48,000 $28,800 $17,280 $17,280 $8,640
Taxable Income Incom e Taxes (40%)
$160,000 $142,000 $161,200 $172,720 $172,720 $181,360 $64,000 $56,800 $64,480 $69,088 $69,088 $72,544
Net Income
$96,000
$85,200
$96,720 $103,632 $103,632 $108,816
$96,000 $30,000
$85,200 $48,000
$96,720 $103,632 $103,632 $108,816 $28,800 $17,280 $17,280 $8,640
Cash Flow Statement
Operating Activities: Net Incom e Depreciation Investment Activities Inv estm ent Salvage Gains Tax Net Cash Flow PW(12%)
($150,000) $0 $0 ($150,000) $126,000 $133,200 $125,520 $120,912 $120,912 $117,456 $362,986.22
Since PW(12%) > 0, this project is acceptable.
Page | 6
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.10 0
1
2
3
4
5
Income Statement
Revenues Expenses O&M Depreciation
$250,000 $250,000 $250,000 $250,000 $250,000
Taxable Income Income Taxes (40%)
$154,000 $126,400 $155,840 $173,504 $186,752 $61,600 $50,560 $62,336 $69,402 $74,701
$50,000 $46,000
Net Income
$50,000 $73,600
$50,000 $44,160
$50,000 $26,496
$50,000 $13,248
$92,400
$75,840
$93,504 $104,102 $112,051
$92,400 $46,000
$75,840 $73,600
$93,504 $104,102 $112,051 $44,160 $26,496 $13,248
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities Investment Salvage Gains Tax Net Cash Flow PW(15%)
IRR
($230,000) $5,000 $8,598
($230,000) $138,400 $149,440 $137,664 $130,598 $138,898 $237,588.96
53.95%
Return on invest = 53.95%.
Page | 7
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.11 Investment in energy management system: N = 7 years 0
1
2
3
4
5
6
7
Income Statement
Revenues Expenses O&M Depreciation
$14,000
$14,000
$14,000
$14,000
$14,000
$14,000
$14,000
$0 $18,332
$0 $24,448
$0 $8,146
$0 $4,076
$0 $0
$0 $0
$0 $0
Taxable Income Income Taxes (35%)
($4,332) ($10,448) ($1,516) ($3,657)
$5,855 $2,049
$9,925 $3,474
$14,000 $4,900
$14,000 $4,900
$14,000 $4,900
Net Income
($2,815)
($6,791)
$3,805
$6,451
$9,100
$9,100
$9,100
($2,815) $18,332
($6,791) $24,448
$3,805 $8,146
$6,451 $4,076
$9,100 $0
$9,100 $0
$9,100 $0
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities Investment Salvage Gains Tax Net Cash Flow PW(12%)
($55,000) $0 $0 ($55,000) $2,015.82
$15,516
$17,657
$11,951
$10,526
$9,100
$0 $0 $9,100
$0 $0 $9,100
Page | 8
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.12 Investment decision based on after-tax IRR: 0
1
2
3
4
5
Income Statement
Revenues Expenses O&M Depreciation
$150,000 $150,000 $150,000 $150,000 $150,000 $30,000 $30,000 $115,958 $154,646
$30,000 $51,525
$30,000 $25,780
$30,000 $0
Taxable Income Income Taxes (40%)
$4,042 ($34,646) $68,475 $1,617 ($13,858) $27,390
$94,220 $120,000 $37,688 $48,000
Net Income
$2,425
$41,085
$56,532
$72,000
$2,425 ($20,788) $41,085 $115,958 $154,646 $51,525
$56,532 $25,780
$72,000 $0
($20,788)
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities Investment Salvage Gains Tax N tC
h Fl
($347,910) $0 $0 ($347 910) $118 383 $133 858
$92 610
$82 312
$72 000
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.12 Investment decision based on after-tax IRR: 0
1
2
3
4
5
Income Statement
Revenues Expenses O&M Depreciation
$150,000 $150,000 $150,000 $150,000 $150,000 $30,000 $30,000 $115,958 $154,646
$30,000 $51,525
$30,000 $25,780
$30,000 $0
Taxable Income Income Taxes (40%)
$4,042 ($34,646) $68,475 $1,617 ($13,858) $27,390
$94,220 $120,000 $37,688 $48,000
Net Income
$2,425
$41,085
$56,532
$72,000
$2,425 ($20,788) $41,085 $115,958 $154,646 $51,525
$56,532 $25,780
$72,000 $0
($20,788)
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities Investment Salvage Gains Tax Net Cash Flow
($347,910) $0 $0 ($347,910) $118,383 $133,858
$92,610
$82,312
$72,000
Page | 9
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
Investment in Working Capital 10.13 0
1
2
3
4
5
6
7
8
9
10
Income Statement
Revenues Expenses Production cost Depreciation: Building Equipment
$775,000 $775,000 $775,000 $775,000 $775,000 $775,000 $775,000 $775,000 $775,000
$775,000
$465,000 $465,000 $465,000 $465,000 $465,000 $465,000 $465,000 $465,000 $465,000
$465,000
$38,462 $0
$36,860 $0
Taxable Income Income Taxes (40%)
$198,833 $144,191 $180,591 $206,591 $225,103 $225,155 $225,103 $248,347 $271,539 $79,533 $57,676 $72,236 $82,636 $90,041 $90,062 $90,041 $99,339 $108,615
$273,141 $109,256
Net Income
$119,300
$163,884
$36,860 $38,462 $74,308 $127,348
$38,462 $90,948
$38,462 $64,948
$38,462 $46,436
$38,462 $46,384
$38,462 $46,436
$38,462 $23,192
$86,514 $108,354 $123,954 $135,062 $135,093 $135,062 $149,008 $162,923
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities Land Building Machines Gains Tax Land B ildi
$119,300 $86,514 $108,354 $123,954 $135,062 $135,093 $135,062 $149,008 $162,923 $111,168 $165,810 $129,410 $103,410 $84,898 $84,846 $84,898 $61,654 $38,462 ($350,000) ($1,500,000) ($520,000)
$163,884 $36,860 $500,000 $800,000 $50,000 ($52,500) $111 506
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
Investment in Working Capital 10.13 0
1
2
3
4
5
6
7
8
9
10
Income Statement
Revenues Expenses Production cost Depreciation: Building Equipment
$775,000 $775,000 $775,000 $775,000 $775,000 $775,000 $775,000 $775,000 $775,000
$775,000
$465,000 $465,000 $465,000 $465,000 $465,000 $465,000 $465,000 $465,000 $465,000
$465,000
$38,462 $0
$36,860 $0
Taxable Income Income Taxes (40%)
$198,833 $144,191 $180,591 $206,591 $225,103 $225,155 $225,103 $248,347 $271,539 $79,533 $57,676 $72,236 $82,636 $90,041 $90,062 $90,041 $99,339 $108,615
$273,141 $109,256
Net Income
$119,300
$163,884
$36,860 $38,462 $74,308 $127,348
$38,462 $90,948
$38,462 $64,948
$38,462 $46,436
$38,462 $46,384
$38,462 $46,436
$38,462 $23,192
$86,514 $108,354 $123,954 $135,062 $135,093 $135,062 $149,008 $162,923
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities Land Building Machines Gains Tax Land Building Machines Working Capital Net Cash Flow PW(15%)
$119,300 $86,514 $108,354 $123,954 $135,062 $135,093 $135,062 $149,008 $162,923 $111,168 $165,810 $129,410 $103,410 $84,898 $84,846 $84,898 $61,654 $38,462 ($350,000) ($1,500,000) ($520,000)
$500,000 $800,000 $50,000 ($52,500) $111,506 ($17,500) $250,000
($250,000) ($2,620,000) $230,467 $252,324 $237,764 $227,364 $219,959 $219,938 $219,959 $210,661 $201,385 ($1,073,849.06)
(a) PW (15%) with working capital
$163,884 $36,860
$1,842,250
$1, 073,849 , not an acceptable project.
= −
(b) PW (15%) without working capital
$885, 645 , still not acceptable.
= −
Page | 10
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.14 0
1
2
3
4
5
6
Income Statement
Revenues Expenses Operating cost Depreciation
$65,800
$65,800
$65,800
$65,800
$65,800
$65,800
$9,150 $17,100
$9,150 $27,360
$9,150 $16,416
$9,150 $9,850
$9,150 $9,850
$9,150 $4,925
Taxable Income Income Taxes (35%)
$39,550 $13,843
$29,290 $10,252
$40,234 $14,082
$46,800 $16,380
$46,800 $16,380
$51,725 $18,104
Net Income
$25,708
$19,039
$26,152
$30,420
$30,420
$33,621
$25,708 $17,100
$19,039 $27,360
$26,152 $16,416
$30,420 $9,850
$30,420 $9,850
$33,621 $4,925
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities Investment Salvage Gains Tax Working Capital Net Cash Flow
($85,500) $5,000 ($1,750) $15,000
($15,000) ($100,500) $42,808
$46,399
$42,568
$40,270
$40,270
$56,796
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.14 0
1
2
3
4
5
6
Income Statement
Revenues Expenses Operating cost Depreciation
$65,800
$65,800
$65,800
$65,800
$65,800
$65,800
$9,150 $17,100
$9,150 $27,360
$9,150 $16,416
$9,150 $9,850
$9,150 $9,850
$9,150 $4,925
Taxable Income Income Taxes (35%)
$39,550 $13,843
$29,290 $10,252
$40,234 $14,082
$46,800 $16,380
$46,800 $16,380
$51,725 $18,104
Net Income
$25,708
$19,039
$26,152
$30,420
$30,420
$33,621
$25,708 $17,100
$19,039 $27,360
$26,152 $16,416
$30,420 $9,850
$30,420 $9,850
$33,621 $4,925
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities Investment Salvage Gains Tax Working Capital Net Cash Flow PW(18%)
($85,500) $5,000 ($1,750) $15,000
($15,000)
($100,500) $42,808 $54,420.65
$46,399
$42,568
$40,270
$40,270
$56,796
Since PW(18%) > 0, this project is acceptable. The IRR is 37.20%.
Page | 11
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.15 -3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
Income Statement
Revenues Expenses R&D expenses Production cost Depreciation: Building Equipment
($500,000)
($2,500,000)
($2,000,000)
$50,000,000 $55,000,000
$60,500,000
$66,550,000
$73,205,000 $80,525,500 $72,472,950 $65,225,655
$58,703,090 $52,832,781
$40,000,000 $44,000,000
$48,400,000
$53,240,000
$58,564,000 $64,420,400 $57,978,360 $52,180,524
$46,962,472 $42,266,224
$51,282 $524,700
$51,282 $374,700
$49,146 $428,700
$51,282 $734,700
$51,282 $267,900
$51,282 $267,600
$51,282 $267,900
$51,282 $133,800
$51,282 $0
$49,146 $0
Taxable Income Income Taxes (40%)
($500,000) ($200,0 00)
($2,500,000) ($1,0 00,0 00)
($2,000,000) ($800,0 00)
$9,522,154 $10,214,018 $3,808,862 $4,085,607
$11,524,018 $12,8 84,018 $14,321,818 $15,786,218 $14,175,408 $12,860,049 $11,689,336 $10,517,410 $4,609,607 $5,153,607 $5,728,727 $6,314,487 $5,670,163 $5,144,020 $4,675,734 $4,206,964
Net Income
($300,000)
($1,500,000)
($1,200,000)
$5,713,292 $6,128,411
$6,914,411
$7,730,411
$8,593,091 $9,471,731 $8,505,245
$7,716,029
$7,013,602 $6,310,446
$5,713,292 $6,128,411 $477,846 $785,982
$6,914,411 $575,982
$7,730,411 $425,982
$8,593,091 $9,471,7 31 $8,505,245 $319,182 $318,882 $319,182
$7,716,029 $185,082
$7,013,602 $6,310,446 $51,282 $49,146
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities Building Machines
($300,0 00) ($1,500,000)
($1,2 00,0 00)
($2,000,000) ($3,000,000)
$1,000,000 $300,000
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.15 -3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
Income Statement
Revenues Expenses R&D expenses Production cost Depreciation: Building Equipment
($500,000)
($2,500,000)
($2,000,000)
$50,000,000 $55,000,000
$60,500,000
$66,550,000
$73,205,000 $80,525,500 $72,472,950 $65,225,655
$58,703,090 $52,832,781
$40,000,000 $44,000,000
$48,400,000
$53,240,000
$58,564,000 $64,420,400 $57,978,360 $52,180,524
$46,962,472 $42,266,224
$51,282 $524,700
$51,282 $374,700
$49,146 $428,700
$51,282 $734,700
$51,282 $267,900
$51,282 $267,600
$51,282 $267,900
$51,282 $133,800
$51,282 $0
$49,146 $0
Taxable Income Income Taxes (40%)
($500,000) ($200,0 00)
($2,500,000) ($1,0 00,0 00)
($2,000,000) ($800,0 00)
$9,522,154 $10,214,018 $3,808,862 $4,085,607
$11,524,018 $12,8 84,018 $14,321,818 $15,786,218 $14,175,408 $12,860,049 $11,689,336 $10,517,410 $4,609,607 $5,153,607 $5,728,727 $6,314,487 $5,670,163 $5,144,020 $4,675,734 $4,206,964
Net Income
($300,000)
($1,500,000)
($1,200,000)
$5,713,292 $6,128,411
$6,914,411
$7,730,411
$8,593,091 $9,471,731 $8,505,245
$7,716,029
$7,013,602 $6,310,446
$5,713,292 $6,128,411 $477,846 $785,982
$6,914,411 $575,982
$7,730,411 $425,982
$8,593,091 $9,471,7 31 $8,505,245 $319,182 $318,882 $319,182
$7,716,029 $185,082
$7,013,602 $6,310,446 $51,282 $49,146
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities Building Machines Gains Tax Building Machines Working Capital Net Cash Flow PW(20 %)
($300,0 00) ($1,500,000)
($300,000)
($1,500,000)
($1,2 00,0 00)
($1,200,0 00)
Decision
($2,000,000) ($3,000,000)
$1,000,000 $300,000
($5,000,000)
($500,000) ($550,000)
$196,581 ($120,000) $587,031 $5,283,278
($10,000,000) $10,252,872.91
$5,691,138 $6,364,393
($605,000) $6,885,393
($665,500) $7,490,893
($732,050)
$805,255
$724,730
$652,257
$8,180,223 $10,595,868 $9,549,156
$8,553,368
$7,651,914 $13,019,451
Accept
IRR
43.28%
Page | 12
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
Effects of Borrowing 10.16 Revenues Expenses
$3,833,542
$3,833,542
$3,833,542
$3,833,542
$3,833,542
$435,000 $294,872 $1,550,000
$485,000 $307,692 $1,296,114
$535,000 $307,692 $1,016,839
$585,000 $307,692 $709,637
$635,000 $294,872 $371,715
Taxable Income Income Taxes (35%)
$1,553,670 $543,785
$1,744,736 $610,658
$1,974,011 $690,904
$2,231,213 $780,925
$2,531,955 $886,184
Net Income
$1,009,886
$1,134,078
$1,283,107
$1,450,288
$1,645,771
Cash Flow Statement Operating Activities: Net Income Depreciation Investment Activities Investment (Building)
$1,009,886 $294,872
$1,134,078 $307,692
$1,283,107 $307,692
$1,450,288 $307,692
$1,645,771 $294,872
O&M Depreciation Debt interest
($12,000,000)
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
Effects of Borrowing 10.16 Revenues Expenses
$3,833,542
$3,833,542
$3,833,542
$3,833,542
$3,833,542
$435,000 $294,872 $1,550,000
$485,000 $307,692 $1,296,114
$535,000 $307,692 $1,016,839
$585,000 $307,692 $709,637
$635,000 $294,872 $371,715
Taxable Income Income Taxes (35%)
$1,553,670 $543,785
$1,744,736 $610,658
$1,974,011 $690,904
$2,231,213 $780,925
$2,531,955 $886,184
Net Income
$1,009,886
$1,134,078
$1,283,107
$1,450,288
$1,645,771
$1,009,886 $294,872
$1,134,078 $307,692
$1,283,107 $307,692
$1,450,288 $307,692
$1,645,771 $294,872
O&M Depreciation Debt interest
Cash Flow Statement Operating Activities: Net Income Depreciation Investment Activities Investment (Building) Investment(Land) Salvage (Building) Salvage (Land) Gains Tax Financial activities Borrowed funds Principal repayment
Net Cash Flow PW(15 %) Decision
($12,000,000) ($3,500,000) $13,500,000 $3,500,000 ($1,054,487)
15,500,000 ($2,538,861)
($2,792,747)
($3,072,022)
($3,379,224)
($3,717,146)
$0 ($1,234,104) $3,048,956.65
($1,350,977)
($1,481,223)
($1,621,244) $14,169,010
Accept
Page | 13
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.17 0
1
2
3
4
5
6
7
Income Statement
Revenues Expenses Depreciation Debt interest
$150,000 $150,000 $150,000 $150,000 $150,000 $150,000 $24,192 $12,000
$24,192 $9,000
$150,000
$42,000 $21,000
$67,200 $18,000
$40,320 $15,000
$12,096 $6,000
$0 $3,000
Taxable Income Income Taxes (35%)
$87,000 $30,450
$64,800 $22,680
$94,680 $113,808 $116,808 $131,904 $33,138 $39,833 $40,883 $46,166
$147,000 $51,450
Net Income
$56,550
$42,120
$61,542
$73,975
$75,925
$85,738
$95,550
$56,550 $42,000
$42,120 $67,200
$61,542 $40,320
$73,975 $24,192
$75,925 $24,192
$85,738 $12,096
$95,550 $0
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities Investment Salvage Gains Tax Financing Activities Borrowed funds Principal repayment Net Cash Flow PW(15%)
($210,000) $60,000 ($21,000) $210,000 ($30,000) ($30,000) ($30,000) ($30,000) ($30,000) ($30,000) ($30,000) $0 $309,302.46
$68,550
$79,320
$71,862
$68,167
$70,117
$67,834
$104,550
Page | 14
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.18 • •
Annual payment = $115, 000( A / P,11%, 5) = $31,116 New after-tax cash flow 0
1
2
3
4
5
Income Statement
Revenues Expenses O&M Depreciation Debt interest
$250,000
$250,000
$250,000
$250,000
$250,000
$50,000 $46,000 $12,650
$50,000 $73,600 $10,619
$50,000 $44,160 $8,364
$50,000 $26,496 $5,861
$50,000 $13,248 $3,084
Taxable Income Income Taxes (40%)
$141,350 $56,540
$115,781 $46,312
$147,476 $58,990
$167,643 $67,057
$183,668 $73,467
$84,810
$69,469
$88,486
$100,586
$110,201
$84,810 $46,000
$69,469 $73,600
$88,486 $44,160
$100,586 $26,496
$110,201 $13,248
Net Income Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities Investment Salvage Gains Tax Financing Activities Borrowed funds Principal repayment Net Cash Flow PW(15%)
($230,000) $5,000 $8,598 $115,000
($115,000) $260,050.00
($18,466)
($20,497)
($22,751)
($25,254)
($28,032)
$112,344
$122,572
$109,894
$101,827
$109,015
10.19 0
1
2
Operating activi ties
Net income Depreciation Investment Activi ties Investment Salvage Gains Tax(40%) Financing Activities Borrowed funds Principal repayment Net Cash Flo w PW(15%)
$10,400 $6,666
$12,019 $4,445
($20,000) $8,000 $356 $10,000 ($4,762) ($10,000) $12,304 $15,506
($5,238) $19,582
Note: Annual installments for the loan = $10,000( A / P,10%, 2) = $5,762
Page | 15
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.20 Income statement approach:
Input Tax Rate(% )= MARR(%) =
40 18
0
1
Output PW(i) = $290,751 IRR(%) = 68.58%
(a) 2
3
4
5-7
8
9
10
Income Statement
Revenues: Additional revenue Labor & materials savings Expenses: Depreciation Debt interest Taxable Income Income Taxes Net Income
$85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $ 65,000 $ 65,000 $ 65,000 $ 65,000 $ 65,000 $ 65,000 $ 65,000 $ 65,000 $ 31,438 $ 10,800 $ 107,762 $ 43,105 $64,657
$ $ $ $
53,878 7,200 88,922 35,569 $53,353
$ 38,478 $ 27,478 $ 19,646 $ 3,600 $ 107,922 $ 122,522 $ 130,354 $ 43,169 $ 49,009 $ 52,142 $64,753 $73,513 $78,212
$ 9,812 $ 140,188 $ 150,000 $ 150,000 $ 56,075 $ 60,000 $ 60,000 $84,113 $90,000 $90,000
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities: Investment Salvage Gains Tax Financing Activities: Borrowed funds Principal repayment Net Cash Flow
$ 64,657 $ 53,353 $ 64,753 $ 73,513 $ 78,212 $ 84,113 $ 90,000 $ 90,000 $ 31,438 $ 53,878 $ 38,478 $ 27,478 $ 19,646 $ 9,812 $ - $ $ (220,000) $ 20,000 $ (8,000) $
120,000 $ (40,000) $ (40,000) $ (40,000) ($100,000) $56,095 $67,231 $63,231 $100,991 $97,858 $93,925 $90,000 $102,000
Since PW(18%) > 0, this project is acceptable.
Page | 16
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.21(a) and (b)
Input Tax Rate(%) = MARR(%) = 0
Output PW(i) = AE(i)=
35 18 1
2
3
($1,648,462) ($527,142) 4
5
Income Statement
Revenues (savings) Expenses: Depreciation Debt interest Taxable Income Income Taxes (35%)
357,250 100,000 ($457,250) (160,038)
612,250 83,620 ($695,870) (243,555)
437,250 65,603 ($502,853) (175,998)
312,250 45,783 ($358,033) (125,312)
111,625 23,982 ($135,607) (47,462)
Net Income
($297,213)
($452,316)
($326,854)
($232,721)
($88,144)
Cash Flow Statement
Operating Activities: Net Income $ (297,213) $ (452,316) $ (326,854) $ Depreciation $ 357,250 $ 612,250 $ 437,250 $ Investment Activities: Investment $ (2,500,000) Salvage Gains Tax Financing Activities: Borrowed funds $ 1,000,000 Principal repayment $ (163,797) $ (180,177) $ (198,195) $ Net Cash Flow
($1,500,000) $ (103,760) $ (20,243) $ (87,799) $
(232,721) $ (88,144) 312,250 $ 111,625
$ 250,000 $ 146,781
(218,014) $ (239,816) (138,486) $ 180,446
Page | 17
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.22 (a) After-tax cash flow
Input Tax Rate(%) = MARR(%) = 0
Output 35 15 1
2
PW(i) = IRR(%) =
$4,977
3
4
5
6
Income Statement
Revenues (savings) Expenses: Depreciation Debt interest Taxable Income Income Taxes (36%) Net Income
$13,000
$13,000
$13,000
$13,000
$13,000
$13,000
$6,431 $5,400 $1,170 $409
$11,021 $4,735 ($2,755) ($964)
$7,871 $3,989 $1,140 $399
$5,621 $3,155 $4,225 $1,479
$4,019 $2,220 $6,762 $2,367
$2,009 $1,173 $9,818 $3,436
$760
($1,791)
$741
$2,746
$4,395
$6,382
$760 $6,431
($1,791) $11,021
$741 $7,871
$2,746 $5,621
$4,395 $4,019
$6,382 $2,009
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities: Investment Salvage Gains Tax Financing Activities: Borrowed funds Principal repayment Net Cash Flow
($45,000) $4,000 $1,411 $45,000 $0
($5,545)
($6,211)
($6,956)
($7,791)
($8,725)
($9,772)
$1,646
$3,019
$1,656
$576
($312)
$4,029
(b) No meaningful IRR exists. We need to use present worth analysis. Since PW (15%) > 0, this project is acceptable.
Page | 18
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.23 (a) and (b)
Input Tax Rate(%) = MARR(%) = 0
Output PW(i) = $29,052 IRR(%) = 26.26%
40 14 1
2
3
4
5
6
7
8
Income Statement
Revenues (savings) Expenses: O&M cost Depreciation Debt interest
$48,000 $48,000 $48,000 $48,000 $48,000 $48,000 $48,000 $48,000
Taxable Income Income Taxes (40%)
$14,852 5,941
11000 17148 5000
Net Income
$8,911
11000 29388 4563
11000 20988 4082
11000 14988 3553
11000 10716 2971
11000 10704 2331
11000 10716 1627
11000 5352 852
$3,049 $11,930 $18,459 $23,313 $23,965 $24,657 $30,796 1,220 4,772 7,384 9,325 9,586 9,863 12,318 $1,830
$7,158 $11,076 $13,988 $14,379 $14,794 $18,478
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities: Investment Salvage Gains Tax Financing Activities: Borrowed funds Principal repayment Net Cash Flow
$ 8,911 $ 1,830 $ 7,158 $ 11,076 $ 13,988 $ 14,379 $ 14,794 $ 18,478 $ 17,148 $ 29,388 $ 20,988 $ 14,988 $ 10,716 $ 10,704 $ 10,716 $ 5,352 $ (120,000) $ 10,000 $ (4,000) $ 50,000 $ (4,372) $ (4,809) $ (5,290) $ (5,819) $ (6,401) $ (7,041) $ (7,746) $ (8,520) ($70,000) $21,687 $26,408 $22,856 $20,244 $18,303 $18,042 $17,765 $21,309
Page | 19
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
Generalized Cash Flow Method 10.24 (a) with no borrowed funds:
Input Data Tax Rate(%) = MARR(%) =
Output PW(9%) =
35 9
$1,537
Financial Data
year Depreciation Book value Salvage value Gains tax Loan payment schedule Interest Principal Revenues O & M costs
0 $
1 2 3 4 5 $ 2,666 $ 3,556 $ 1,185 $ 593 8,000 $ 5,334 $ 1,778 $ 593 $ - $ $ 2,000 $ (700)
$ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500
Cash Flow Statement
Investment Net proceeds from sale Investment in working capital Recovery of working capital (1 - 0.35) (Revenue) -(1 - 0.35) (Expenses) -(1 - 0.35) (Debt interest) + (0.35) (Depreciation) Borrowed funds Principal repayment Net Cash Flow
0 ($8,000)
1
2
3
4
5 $1,300
$1,625 $1,625 $1,625 $1,625 $ 933 $ 1,245 $ 415 $ 207
$1,625 -
($8,000) $2,558
-
-
$2,870
$2,040
$1,832
$2,925
Page | 20
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
(b) With borrowed funds:
Input Data Tax Rate(%)= MARR(%)= year Depreciation Book value Salvage value Gains tax Loan payment schedule Interest Principal Revenues O&M costs
0 $8,000
$
Output PW(9%)= $14,454
35 9 1 $2,666 5,334
2 $3,556 1,778
3 $1,185 593
4 $593 0
5 $0 0 $2,000 -700
$ 720 $ 600 $ 469 $ 326 $ 170 8,000 $ 1,337 $ 1,457 $ 1,588 $ 1,731 $ 1,887 $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500
Cash Flow Statement
Investment Net proceeds from sale Investment in working capital Recovery of working capital (1 - 0.35) (Revenue) -(1 - 0.35) (Expenses) -(1 - 0.35) (Debt interest) + (0.35) (Depreciation) Borrowed funds Principal repayment Net Cash Flow
0 ($8,000)
1
2
3
4
5 $1,300
$1,625 $1,625 $1,625 $1,625 $1,625 (468) (390) (305) (212) (110) 933 1,245 415 207 $8,000 $ 1,337 $ 1,457 $ 1,588 $ 1,731 $ 1,887 $0
$3,427
$3,937
$3,323
$3,352
$4,702
(c) Which alternative to choose? Debt financing option is more attractive.
Page | 21
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.25 Net cash flow
Input Data Tax Rate(%) = MARR(%) =
Output PW(12%) = $86,984
40 12
Financial Data
year Depreciation Book value Salvage value Gains tax Loan payment schedule Interest Principal Revenues O&M costs
0
$
1 2 3 4 5 $ 19,292 $ 33,062 $ 23,612 $ 16,862 $ 6,028 135,000 $ 115,709 $ 82,647 $ 59,036 $ 42,174 $ 36,146 $ 50,000 $ (5,542)
$
$ 13,500 $ 11,289 $ 8,856 $ 6,181 $ 3,238 135,000 $ 22,113 $ 24,324 $ 26,756 $ 29,432 $ 32,375 $ 68,000 $ 68,000 $ 68,000 $ 68,000 $ 68,000
Cash Flow Statement
0 ($135,000)
Investment Net proceeds from sale Investment in working capital Recovery of working capital (1 - 0.40) (Revenue) -(1 - 0.40) (Expenses) -(1 - 0.40) (Debt interest) + (0.40) (Depreciation) Borrowed funds Principal repayment Net Cash Flow
1
2
3
4
5 $44,459
$40,800 $40,800 $40,800 $40,800 $40,800 $ (8,100) $ (6,773) $ (5,314) $ (3,708) $ (1,943) $ 7,717 $ 13,225 $ 9,445 $ 6,745 $ 2,411 $
135,000 $ (22,113) $ (24,324) $ (26,756) $ (29,432) $ (32,375) $0
$18,304
$22,927
$18,174
$14,404
$53,352
Page | 22
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.26 Air South Airline 0
Cash Flow Statement
Investment Net proceeds from sale Investment in working capital Recovery of working capital
$
1
2
3
4
5
6
7
$ 21,700 $ (12,400) $ (4,018) $ 3,257
$ 21,700 $ (12,400) $ (4,018) $ 5,584
$ 21,700 $ (12,400) $ (4,018) $ 3,988
$ 21,700 $ (12,400) $ (4,018) $ 2,849
$ 21,700 $ (12,400) $ (4,018) $ 2,035
$ 21,700 $ (12,400) $ (4,018) $ 2,035
$ 21,700 $ (12,400) $ (4,018) $ 2,035
8,539
$ 10,866
$
$
$
$
$
9
10
(60,000)
(1 - 0.38)(Revenue) -(1 - 0.38)(Expenses) -(1 - 0.38) (Debt interest) +(0.38)(Depreciation) Borrowed funds Principal repayment
$
54,000
Net cash flow
$
(6,000) $ 8
Cash Flow Statement
9,270 11
8,131
7,317
12
7,317
13
14
Investment Net proceeds from sale Investment in working capital Recovery of working capital (1 - 0.38)(Revenue) -(1 - 0.38)(Expenses) -(1 - 0.38) (Debt interest) +(0.38)(Depreciation)
7,317 15
$
$ $ $ $
5,580
21,700 $ 21,700 $ 21,700 $ 21,700 $ 21,700 $ 21,700 $ 21,700 $ 21,700 (12,400) $ (12,400) $ (12,400) $ (12,400) $ (12,400) $ (12,400) $ (12,400) $ (12,400) (4,018) $ (4,018) $ (4,018) 1,017
Borrowed funds Principal repayment
$ (54,000)
Net cash flow
$
6,299
PW(18%) =
$
5,282
$ (48,718) $
9,300
$
9,300
$
9,300
$
9,300
$ 14,880
$ 26,663 > 0, Accept the investm ent.
Page | 23
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
Comparing Mutually Exclusive Alternatives 10.27 (a) The net after-tax cash flows for each financing option: •
Option 1: Retained earnings
Input Tax Rate(%) = MARR(%) = Option 1: Financing with retained earnings 0 Income Statement
Output PW(i) = $161,321 IRR(%) = 42.46%
39 18 1
2
3
4
5
6
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
Comparing Mutually Exclusive Alternatives 10.27 (a) The net after-tax cash flows for each financing option: •
Option 1: Retained earnings
Input Tax Rate(%) = MARR(%) = Option 1: Financing with retained earnings 0
Output PW(i) = $161,321 IRR(%) = 42.46%
39 18 1
2
3
4
5
6
Income Statement
Revenues (savings) Expenses: O&M costs Depreciation Debt interest
$174,000 $174,000 $174,000 $174,000 $174,000 $174,000
Taxable Income Income Taxes
$123,420 $103,020 $117,020 $127,020 $134,140 $143,080 48,134 40,178 45,638 49,538 52,315 55,801
$22,000 28,580
Net Income
$75,286
$22,000 48,980
$62,842
$22,000 34,980
$71,382
$22,000 24,980
$77,482
$22,000 17,860
$22,000 8,920
$81,825
$87,279
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities: Investment Salvage Gains Tax Working capital Financing Activities: Borrowed funds Principal repayment Net Cash Flow
$ 75,286 $ 62,842 $ 71,382 $ 77,482 $ 81,825 $ 87,279 $ 28,580 $ 48,980 $ 34,980 $ 24,980 $ 17,860 $ 8,920 $
$
(200,000)
(25,000)
($225,000) $103,866 $111,822 $106,362 $102,462
$ 30,000 $ 2,223 $ 25,000
$99,685 $153,422
Page | 24
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
(b) Vermont’s PW cost of owning the equipment by borrowing: Input Tax Rate(%) = MARR(%) = Option 2: Owning the equipment by borrowing 0
Output PW(i) = $214,469 IRR(%) = 263.36%
39 18 1
2
3
4
5
6
Income Statement
Revenues (savings) Expenses: O&M costs Depreciation Debt interest
$174,000 $174,000 $174,000 $174,000 $174,000 $174,000 $22,000 $28,580 $24,000
$22,000 $48,980 $21,043
$22,000 $34,980 $17,730
$22,000 $24,980 $14,020
$22,000 $17,860 $9,866
$22,000 $8,920 $5,212
Taxable Income Income Taxes
$99,420 $38,774
$81,977 $31,971
$99,290 $113,000 $124,274 $137,868 $38,723 $44,070 $48,467 $53,769
Net Income
$60,646
$50,006
$60,567
$68,930
$75,807
$84,099
$60,646 $28,580
$50,006 $48,980
$60,567 $34,980
$68,930 $24,980
$75,807 $17,860
$84,099 $8,920
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities: Investment Salvage Gains Tax Working capital Financing Activities: Borrowed funds Principal repayment Net Cash Flow
-$200,000 $30,000 $2,223 $25,000
-$25,000 $200,000
-$25,000
-$24,645
-$27,603
-$30,915
-$34,625
-$38,780
-$43,433
$64,581
$71,384
$64,632
$59,285
$54,888 $106,809
Page | 25
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
(c) Vermont’s PW cost of leasing the equipment: Input Tax Rate(%) = MARR(%) =
Output PW(i) = $170,092 IRR(%) = 101.06%
39 18
Option 3: Leasing the equipment 0
1
2
3
4
5
6
Income Statement
Revenues (savings) Expenses: O&M costs Leasing costs Debt interest
$174,000 $174,000 $174,000 $174,000 $174,000 $174,000
$55,000
$22,000 $55,000
$22,000 $55,000
$22,000 $55,000
$22,000 $55,000
$22,000 $55,000
$22,000
Taxable Income Income Taxes
-$55,000 -$21,450
$97,000 $37,830
$97,000 $37,830
$97,000 $37,830
$97,000 $37,830
$97,000 $152,000 $37,830 $59,280
Net Income
-$33,550
$59,170
$59,170
$59,170
$59,170
$59,170
$92,720
-$33,550
$59,170
$59,170
$59,170
$59,170
$59,170
$92,720
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities: Investment Salvage Gains Tax Working capital Financing Activities: Borrowed funds Principal repayment Net Cash Flow
-$25,000
-$58,550
$25,000
$59,170
$59,170
$59,170
$59,170
$59,170 $117,720
(d) Option 2 is the best alternative.
Page | 26
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.28 •
Option 1: Lease PW (12%) lease
$144,000(1 − 0.40)(1 + ( P / A,12%,29))
= −
$779,483.52 Option 2: Purchase = −
•
- Note 1: It is assumed that the property is placed in service during January. D1 , D30
=
(11.5 / 12)(1 / 3 9)($650, 000) = $15, 972.22
D2 to D29
=
(12 /12)(1/ 39)($650, 000) = $16,666.67
- Note 2: Property tax calculation: ($800,000)(0.05) = $40,000 Input Tax Rate(% )= MARR(%) =
Output PW(i) = ($931,551)
40 12
0
1
2
3
$ 15,972 $ 40,000 $ (55,972) $ (22,389) $ (33,583)
$ 16,667 $ 40,000 $ (56,667) $ (22,667) $ (34,000)
$ 16,667 $ 40,000 $ (56,667) $ (22,667) $ (34,000)
4
29
30
Income Statement
Revenues: Expenses: Depreciation Property tax Taxable Income Income Taxes Net Income
$ $ $ $ $
16,667 40,000 (56,667) (22,667) (34,000)
$ 16,667 $ 15,972 $ 40,000 $ 40,000 $ (56,667) $ (55,972) $ (22,667) $ (22,389) $ (34,000) $ (33,583)
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities: Investment(land) Investment(structure) Salvage Gains Tax Net Cash Flow
$ (33,583) $ (34,000) $ (34,000) $ (34,000) $ (34,000) $ (33,583) $ 15,972 $ 16,667 $ 16,667 $ 16,667 $ 16,667 $ 15,972 $ $
(150,000) (650,000)
$
$ 215,000 $ 34,556 (800,000) $ (17,611) $ (17,333) $ (17,333) $ (17,333) $ (17,333) $ 231,944
PW (12%) purchase
$931,551
= −
Page | 27
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
Option 3: Remodel
•
- Note 1: Depreciation base: Remodeling cost = $300,000 D1 , D30
=
D2 to D29
(11.5 / 12)(1 / 39)($300, 000) = $7, 372 =
(12 /12)(1/ 39)($300, 000) = $7,692
- Note 2: Property tax calculation: $660,000 (0.05) = $33,000 Cost basis for property tax= Land + building + remodeling cost = $660,000 Input Tax Rate(% )= MARR(%) =
Output PW(i) = ($494,425)
40 12
0
1
2
3
$ 7,372 $ 33,000 $9,000 $ (49,372) $ (19,749) $ (29,623)
$ 7,692 $ 33,000 $9,500 $ (50,192) $ (20,077) $ (30,115)
$ 7,692 $ 33,000 $10,000 $ (50,692) $ (20,277) $ (30,415)
4
29
30
$ $
7,692 33,000 $23,000 $ (63,692) $ (25,477) $ (38,215)
$ 7,372 $ 33,000 $23,500 $ (63,872) $ (25,549) $ (38,323)
$ (29,623) $ (30,115) $ (30,415) $ (30,715) $ $ 7,372 $ 7,692 $ 7,692 $ 7,692 $
(38,215) $ (38,323) 7,692 $ 7,372
(300,000) $ (22,251) $ (22,423) $ (22,723) $ (23,023) $
$ 30,000 $ 15,949 (30,523) $ 14,997
Income Statement
Revenues: Expenses: Depreciation Property tax Lease fee(Parking lot) Taxable Income Income tax Net Income
$ $
7,692 33,000 $10,500 $ (51,192) $ (20,477) $ (30,715)
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities: Investment(Remodeling) Salvage Gain tax Net Cash Flow
$
$
(300,000)
PW (12%)remodel
$494,425
=−
Option 3 is the least cost alternative.
Page | 28
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.29 Comparison by annual equivalent cost (all units in thousand dollars): Book Value (n = 20) Salvage Value Taxable gains Gains tax (39%) Net Proceeds from sale
$380.61 $853.00 $469.39 $183.06 $669.94
$423.80 $470.56 $949.80 $1,054.60 $526 $584.04 $205.14 $227,78 $744.66 $826.82
Plant A •
Capital recovery cost with return: A1
•
=
(1 − 0.39)($1,964) = $1,198.04
Depreciation tax shield: A3
•
($8,530) − $669.94)( A / P,12%,20) + $669.94(0.12) =$1,132.69
After-tax O&M cost: A2
•
=
=
0.39($8,530) [0.0375( P / F,12%,1) + ]( A/ P,12%, 20)
=
$172.22
Total equivalent annual cost: A = $1,132.69 + $1,198.04 − $172.22
•
=
$2,158.51
Unit cost: $2,158,510 50,000,000kWh
=
$0.04317 / kWh
Plant B •
Capital recovery cost with return: A1
•
=
($9,498 − $744.66)( A / P,12%,20) + $744.66(0.12) =$1,261.25
After-tax O&M cost: A2
=
(1 − 0.39)($1,744) + $1,063.84
Page | 29
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458. •
Depreciation tax shield: A3
•
=
0.39($9, 498) [0.0375( P / F,12%,1) + ]( A/ P,12%, 20)
=
$191.76
Total equivalent annual cost: A = $1,261.25 + $1,063.84 − $191.76
•
=
$2,133.33
Unit cost: $2,133,330 50,000,000kWh
=
$0.04267 / kWh
Plant C •
Capital recovery cost with return: A1
•
=
(1 − 0.39)($1,632) = $995.52
Depreciation tax shield: A3
•
($10,546 − $826.82)( A / P,12%,20) + $826.82(0.12) =$1,400.41
After-tax O&M cost: A2
•
=
=
0.39($10, 546) [0.0375( P / F,12%,1) + ]( A/ P,12%, 20)
=
$212.92
Total equivalent annual cost: A = $1,400.41 + $995.52 − $212.92
•
=
$2,183.01
Unit cost: $2,183,010 50,000,000kWh
=
$0.04366 / kWh
Plant B is the most economical.
Page | 30
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
Lease -Versus - Buy Decisions 10.30 (a) Jacob’s cost of leasing in present worth: after-tax lease expense = (1 - 0.40)($12,000) = $7,200 PW (15%) lease = −$7,200 − $7,200( P / A,15%,3) $23,639
= −
(b) Jacob’s cost of owning in present worth: •
PW of after-tax maintenance expenses: $1, 200(1 − 0.40)( P / A,15%, 4)
P1
= −
$2,055
= −
•
PW of after-tax loan repayment P2
$14, 816( P / A,15%, 4)
= −
$42,299
= −
•
PW of tax credit (shield) on depreciation and interest: D n
I n
Sum
1
$9,000
$5,400
$14,400
$5,760
2
$14,400
$4,270
$18,670
$7,468
3
$8,640
$3,005
$11,645
$4,658
4
$2,592
$1,587
$4,179
$1,672
P 3=
•
Combined tax savings
n
$14,674
PW of net proceeds from sale:
P4
=
Total depreciation amount=
$34,632
Book value=
$10,368
Salvage= Taxable Gain= Gain tax= Net proceeds from sale=
$10,000 ($368) ($147) $10,147
$10,147( P / F ,15%, 4) = $5, 802 Page | 31
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
PW (15%) buy
=
P1 + P2
+
P3 + P4
$23,878
= −
(c) Should the truck be leased or purchased? The leasing option is a better choice. 10.31 (a) PW (incremental) cost of owning the equipment: •
PW of after-tax O&M P1
$50, 000(1 − 0.40)( P / A,15%, 4)
= −
$85,649
= −
•
PW of after-tax loan repayment: P2
$37, 857( P / A,15%, 4)
= −
$108,080
= −
•
PW of tax credit (shield) on depreciation and interest: n
Dn
I n
1 $24,000 $12,000 2 $38,400 $9,414 3 $23,040 $6,570 4 $6,912 $3,441 P3
=
Combined Tax Savings $36,000(0.40) = $14,400 $47,817(0.40) = $19,126 $29,610(0.40) = $11,814 $10,353(0.40) = $4,141
2) $14, 400( P / F ,15%,1) + $19,126( P / F,15%,
4) $11,814( P / F ,15%, 3) + $4,141( P / F,15%, = $37,139 +
Page | 32
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458. •
PW of net proceeds from sale: total depreciation amount = $92,352 book value = $27,648 taxable gain = $20,000 - $27,648 = -$7,648 loss credit = (0.40)(-$7,648) = -$3,059 net proceeds from sale = $20,000 -(-$3,059) = $23,059 P4 = $23,059(P / F ,15%,4) = $13,184 PW (15%) buy
=
P1 + P2
+
P3 + P4
Input Tax Rate(%) = MARR(%) = 0
$143, 406
= −
Output PW(i) = ($143,406)
40 15% 1
2
3
4
Incom e Statement
Revenues (savings) Expenses: O&M cost Depreciation Debt interest
50000 24000 12000
50000 38400 9414
50000 23040 6570
50000 6912 3441
Taxable Income Income Taxes (40%)
($86,000) (34,400)
($97,814) (39,126)
($79,610) (31,844)
($60,353) (24,141)
Net Income
($51,600)
($58,689)
($47,766)
($36,212)
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities: Investment Salvage Gains Tax Financing Activities: Borrowed funds Principal repayment Net Cash Flow
$ (51,600) $ (58,689) $ (47,766) $ (36,212) $ 24,000 $ 38,400 $ 23,040 $ 6,912 $ (120,000) $ 20,000 $ 3,059 $ 120,000 $ (25,856) $ (28,442) $ (31,286) $ (34,415) $0
($53,456)
($48,731)
($56,012)
($40,656)
Page | 33
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
(b) PW (incremental) cost of leasing the equipment: •
PW of after-tax operating cost: P1 = −$40, 000(1 − 0.40)( P / A,15%, 4) $68,519
= −
•
PW of after-tax leasing P2 = −$44,000(1 − 0.40) − $44,000(1 − 0.40)( P / A,15%,3) $86,677
= −
P = P1 + P2
$155,196
= −
Input Tax Rate(%) = MARR(%) = 0
Output PW(i) = ($155,197)
40 15% 1
2
3
4
Incom e Statement
Revenues (savings) Expenses: O&M cost Leasing cost Debt interest
$44,000
$0
$0
$0
$0
40000 $44,000
40000 $44,000
40000 $44,000
40000
Taxable Income Income Taxes (40%)
($44,000) (17,600)
($84,000) ($84,000) (33,600) (33,600)
($84,000) (33,600)
($40,000) (16,000)
Net Income
($26,400)
($50,400)
($50,400)
($24,000)
($50,400)
Cash Flow Statement
Operating Activities: Net Income Net Cash Flow
$
(26,400) $ (50,400) $ (50,400) $ (50,400) $ (24,000) ($26,400) ($50,400) ($50,400) ($50,400) ($24,000)
(c) Should ICI buy or lease the equipment? The buying option is a better choice.
Page | 34
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.32 (a) PW of after-tax cash flow of leasing: PW (15%) leas e
$70, 000(1 − 0.4)( P / A,15%, 4)
= −
$119,909 (b) PW of after-tax cash flow of owning: = −
•
PW of after-tax maintenance expenses: $10, 000(1 − 0.40)( P / A,15%, 4)
P1
= −
$17,130
= −
•
PW of after-tax loan repayment P2
$63, 094( P / A,15%, 4)
= −
$180,132
= −
•
•
PW of tax credit (shield) on depreciation and interest: n
D n
I n
Sum
1 2 3 4 P 3=
$66,660 $88,900 $29,620 $14,820 $77,148
$20,000 $15,691 $10,950 $5,736
$86,660 $104,591 $40,570 $20,556
Combined tax savings $34,664 $41,836 $16,228 $8,222
PW of net proceeds from sale: Total depreciation amount= Book value= Salvage= Taxable Gain= Gain tax= Net proceeds from sale=
P4
=
$200,000 $0 $20,000 $20,000 $8,000 $12,000
$12, 000( P / F ,15%, 4) = $6, 861
PW (15%) buy
=
P1 + P2
+
P3 + P4
$113, 253
= −
Page | 35
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.33 (a) Determine the annual cash flows for each option. Buy option: • End of period 1 2
Cash flow elements
0 ($16,170)
Investment Net proceeds −(0.65) I n
0.35 Dn
+
Loan repayment Net cash flow •
$16,170 $0
3
($1,151)
($740)
$5,943 ($275)
$1,132
$1,811
$543
($4,730) ($4,749)
($5,362) ($4,291)
($6,078) $134
Lease option: End of period 1 2
Cash flow elements
0 ($500)
Security deposit Refund −(0.65) Ln
3 $500
Net cash flow
($500)
($3,315)
($3,315)
($3,315)
($3,315)
($3,315)
($2,815)
(b) PW (13%) buy
$7, 470
= −
PW (13%) lease
$7,981
= −
The buy option is a better choice.
10.34 (a) Boggs’ PW cost of leasing: PW (15%) leasing
=
(0.60)($15, 000 + $15, 000( P / A,15%, 2)
=$23,631 (b) Boggs’ PW cost of owning: •
PW of after-tax maintenance expenses: P1
=
$5, 000(1 − 0.40)( P / A,15%, 3)
=
$6,849 Page | 36
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
•
PW cost of after-tax loan repayment: P2
•
=
$41, 635( P / A,15%, 3)
=
$95,062
PW of tax credit (shield) on depreciation and interest:
•
Combined Tax Savings 1 $20, 000 $12, 000 $32, 000(0.40) = $12, 800 2 $32, 000 $8, 444 $40, 444(0.40) = $16,178 3 $9, 600 $4, 461 $14, 061(0.40) = $5, 624 n
P3
Dn
=
I n
2) $12,800( P / F ,15%,1) + $16,178( P / F,15%,
$5, 624( P / F ,15%, 3) = $27,061 +
•
PW of net proceeds from sale: total depreciation amount = $61,600 book value = $38,400 taxable gain = $50,000 - $38,400 = $11,600 loss credit = (0.40)($11,600) = $4,640 net proceeds from sale = $50,000 - $4,640 = $45,360 P4 = $45,360(P / F ,15%,3) = $29,825 PW (15%) buy
=
P1 + P2
−
P3
−
P4
=
$45, 025
(c) Leasing is much cheaper. 10.35 (a) Purchase with debt: •
PW of after-tax revenue: P1
=
$10, 000(1 − 0.30)( P / A,10%, 5) = $26, 536
Page | 37
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458. •
PW of after-tax expenses: P2
•
$2, 500(1 − 0.3)( P / A,10%,5)
= −
$6, 634
= −
PW of after-tax loan repayment: A = $25, 000( A / P,12%, 5)
$6, 935.24 P3 = −$6, 935.24( P / A,10%, 5) = −$26, 290
•
PW of tax credit (shield) on depreciation and interest: n
Dn
I n
1 2 3 4 5
$3, 571 $6,122 $4, 373 $3,123 $1,116
$3, 000 $2, 528 $1, 999 $1, 407 $743
P4 •
= −
=
Combined Tax Savings $6, 571(0.30) = $1, 971 $8, 650(0.30) = $2, 595 $6, 372(0.30) = $1, 912 $4, 530(0.30) = $1, 359 $1,859(0.30) = $558
2) + = $6, 647 $1, 971( P / F ,10%,1) + $2,595( P / F,10%,
PW of net proceeds from sale: total depreciation amount = $18,305 book value = $6,695 taxable gain = $5,000 - $6,695=($1,695) loss credit = (0.30)($1,695) = $509 net proceeds from sale = $5,000 + $509 = $5,509 P5 = $5,509(P / F ,10%, 5) = $3,421 PW (10%) purchase
=
P1 + P2
+
P3 + P4 + P5
=
$3, 680
(b) Financial lease: PW (10%) leas e
= =
(0.7)[ −$3500 + (10, 000 −$2, 500 −$3, 500)( P/ A,10%, 4)]
$9,685
(c) The financial lease is a better choice. Page | 38
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
10.36 Setting the lease payment schedule: Let X denote the annual lease receipt from tractor lease. We will assume that these lease payments are received at year end. Cash Flow Elements Investment Net Proceeds: Security Deposit +(0.65)(Rn ) +(0.35)Dn Net Cash Flow
0 -$53,000
End of Period 1
2
3
0.65X $5,936 0.65X $5,936
$21,423* -$1,500 0.65X $1,781 0.65X $21,704
$1,500
-$51,500
0.65X $3,710 0.65X $3,710
Note: total depreciation amount = $32,648 book value = $53,000 - $32,648 = $20,352 taxable gain = $22,000 - $20,352 = $1,648 gains tax = (0.35)($1,648) = $577 net proceeds from sale = $22,000 - $577 = $21,423 Now to determine the required lease receipt at an after-tax rate of return of 10%, we solve the following equation: $51, 500 = 0.65 X ( P / A,10%, 3) 2) +$3, 710( P / F ,10%,1) + $5, 936( P / F,10%, +$21, 704( P / F ,10%, 3) X = $16,655 per year
Page | 39
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
Short Case Studies ST 10.1
Assume the project life is 10 years. P W (15% ) = $4, 236(0.0745) X ( P / A,15% ,10)
=$250,000,000 X = 157,844 units annually
ST 10.2
(a), (b) 0
1
2
3
4
5-7
8
9
10-11
12
Income Statement
Revenue Expenses: Production costs Depreciation : Building Machines
$
51,000
$
51,000
$ 51,000
$
51,000
$
85,000
$ 136,000
$ 136,000
$ 136,000
$ 136,000
$
36,000
$
36,000
$ 36,000
$
36,000
$
60,000
$
96,000
$
96,000
$
96,000
$ 96,000
$ $
1,106 14,290
$ $
1,154 24,490
$ 1,154 $ 17,490
$ $
1,154 12,490
$ $
1,154 8,930
$ $
1,154 4,460
$
1,154
$
1,154
Taxable Income Income Taxes (40%)
$ $
(396) $ (10,644) $ (158) $ (4,258) $
(3,644) $ (1,458) $
1,356 542
$ $
14,916 5,966
$ $
34,386 13,754
$ $
38,846 15,538
$ $
38,846 15,538
$ 38,894 $ 15,558
Net Income
$
(237) $
(2,186) $
814
$
8,950
$
20,632
$
23,308
$
23,308
$ 23,337
$ $
(237) $ 15,396 $
(6,386) $ (2,186) $ 25,644 $ 18,644 $
814 13,644
$ 8,950 $ 10,084
$ $
20,632 5,614
$ $
23,308 1,154
$ $
23,308 1,154
$ 23,337 $ 1,106
(6,386) $
$
1,106
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities: Land Building Machines Gains Tax Land Building Equipment Net Cash Flow
$ $ $
(5,000) (45,000) (100,000)
$ 8,000 $ 30,000 $ 10,000 $ $ $
($150,000)
$15,158
$19,258
PW(15%) =
($38,794)
$16,458
$14,458
$19,034
IRR =
$26,246
$24,462
$24,462
(1,050) 437 (3,504) $68,326
9.60%
Note: A true sense of capital gains is only realized for the sale of land. (c) Project is not acceptable.
Page | 40
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
ST 10.3 Morgantown Mining Company (a) Unit-production method (Units are thousand dollars) 0
1
2
3
4
5
6
7
8
9
10
$9,500
$9,500
$9,500
$9,500
Income Statement
Revenues (savings) Expenses: O&M Depreciation Taxable Income Income Taxes(40%) Net Income
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$2,400 $1,880 $5,220 $2,088 $3,132
$2,400 $1,880 $5,220 $2,088 $3,132
$2,400 $1,880 $5,220 $2,088 $3,132
$2,400 $1,880 $5,220 $2,088 $3,132
$2,400 $1,880 $5,220 $2,088 $3,132
$2,400 $2,400 $2,400 $2,400 $2,400 $1,880 $1,880 $1,880 $1,880 $1,880 $5,220 $5,220 $5,220 $5,220 $5,220 $2,088 $2,088 $2,088 $2,088 $2,088 $3,132 $3,132 $3,132 $3,132 $3,132
$3,132 $1,880
$3,132 $1,880
$3,132 $1,880
$3,132 $1,880
$3,132 $1,880
$3,132 $1,880
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities:
$3,132 $1,880
$3,132 $1,880
$3,132 $1,880
$3,132 $1,880
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
ST 10.3 Morgantown Mining Company (a) Unit-production method (Units are thousand dollars) 0
1
2
3
4
5
6
7
8
9
10
$9,500
$9,500
$9,500
$9,500
Income Statement
Revenues (savings) Expenses: O&M Depreciation Taxable Income Income Taxes(40%) Net Income
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$2,400 $1,880 $5,220 $2,088 $3,132
$2,400 $1,880 $5,220 $2,088 $3,132
$2,400 $1,880 $5,220 $2,088 $3,132
$2,400 $1,880 $5,220 $2,088 $3,132
$2,400 $1,880 $5,220 $2,088 $3,132
$2,400 $2,400 $2,400 $2,400 $2,400 $1,880 $1,880 $1,880 $1,880 $1,880 $5,220 $5,220 $5,220 $5,220 $5,220 $2,088 $2,088 $2,088 $2,088 $2,088 $3,132 $3,132 $3,132 $3,132 $3,132
$3,132 $1,880
$3,132 $1,880
$3,132 $1,880
$3,132 $1,880
$3,132 $1,880
$3,132 $1,880
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities: Investment ($19,300) Salvage Gains Tax Working capital ($2,500) Net Cash Flow ($21,800)
$3,132 $1,880
$3,132 $1,880
$3,132 $1,880
$3,132 $1,880
$500
$5,012
$5,012
$5,012
$5,012
$5,012
$5,012
$5,012
$5,012
$5,012
$2,500 $8,012
Page | 41
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
(b) 7 year MACRS (Units are thousand dollars) 0
1
2
3
4
5
6
7
8
9
10
Income Statement
Revenues (savings) Expenses: O&M
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
Depreciation Taxable Income Income Taxes(40%)
$2,400 $2,758 $4,342 $1,737
$2,400 $4,727 $2,373 $949
$2,400 $3,376 $3,724 $1,490
$2,400 $2,411 $4,689 $1,876
$2,400 $1,723 $5,377 $2,151
$2,400 $1,722 $5,378 $2,151
$2,400 $1,723 $5,377 $2,151
$2,400 $861 $6,239 $2,496
$2,400 $0 $7,100 $2,840
$2,400 $0 $7,100 $2,840
Net Income
$2,605
$1,424
$2,235
$2,814
$3,226
$3,227
$3,226
$3,744
$4,260
$4,260
$2,605 $2,758
$1,424 $4,727
$2,235 $3,376
$2,814 $2,411
$3,226 $1,723
$3,227 $1,722
$3,226 $1,723
$3,744 $861
$4,260 $0
$4,260 $0
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities: Investment
($19,300)
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
(b) 7 year MACRS (Units are thousand dollars) 0
1
2
3
4
5
6
7
8
9
10
Income Statement
Revenues (savings) Expenses: O&M
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
$9,500
Depreciation Taxable Income Income Taxes(40%)
$2,400 $2,758 $4,342 $1,737
$2,400 $4,727 $2,373 $949
$2,400 $3,376 $3,724 $1,490
$2,400 $2,411 $4,689 $1,876
$2,400 $1,723 $5,377 $2,151
$2,400 $1,722 $5,378 $2,151
$2,400 $1,723 $5,377 $2,151
$2,400 $861 $6,239 $2,496
$2,400 $0 $7,100 $2,840
$2,400 $0 $7,100 $2,840
Net Income
$2,605
$1,424
$2,235
$2,814
$3,226
$3,227
$3,226
$3,744
$4,260
$4,260
$2,605 $2,758
$1,424 $4,727
$2,235 $3,376
$2,814 $2,411
$3,226 $1,723
$3,227 $1,722
$3,226 $1,723
$3,744 $861
$4,260 $0
$4,260 $0
$4,260
$500 ($200) $2,500 $7,060
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities: Investment Salvage Gains Tax Working capital Net Cash Flow
($19,300)
($2,500) ($21,800)
$5,363
$6,151
$5,610
$5,224
$4,949
$4,949
$4,949
$4,604
Page | 42
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
ST 10.4
Given: • • • •
Savings = $314,000 + $35,000 = $349,000 per year Materials (resin) = $350(400) = $140,000 per year Cost base = $187,000 + $10,000 + $15,000 = $212,000 Taxable gain = $30,000
(a) Equity financing (retained earnings): Input Tax Rate(%)= MARR(%)= 0
Output PW(i)= IRR(%)=
40 20 1
2
3
$181,889 50.80% 4
5
6
Income Statement
Revenues (savings) Expenses: O&M costs Resin Software development Depreciation
$349,000
$349,000
$349,000
$349,000
$349,000
$349,000
$36,000 $140,000 $20,000 42,400
$36,000 $140,000
$36,000 $140,000
$36,000 $140,000
$36,000 $140,000
$36,000 $140,000
67,840
40,704
24,422
24,422
12,211
Taxable Income Income Taxes (40%)
$110,600 44,240
$105,160 42,064
$132,296 52,918
$148,578 59,431
$148,578 59,431
$160,789 64,316
$66,360
$63,096
$79,378
$89,147
$89,147
$96,473
Net Income
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
ST 10.4
Given: • • • •
Savings = $314,000 + $35,000 = $349,000 per year Materials (resin) = $350(400) = $140,000 per year Cost base = $187,000 + $10,000 + $15,000 = $212,000 Taxable gain = $30,000
(a) Equity financing (retained earnings): Input Tax Rate(%)= MARR(%)=
Output PW(i)= IRR(%)=
40 20
0
1
2
$181,889 50.80%
3
4
5
6
Income Statement
Revenues (savings) Expenses: O&M costs Resin Software development Depreciation
$349,000
$349,000
$349,000
$349,000
$349,000
$349,000
$36,000 $140,000 $20,000 42,400
$36,000 $140,000
$36,000 $140,000
$36,000 $140,000
$36,000 $140,000
$36,000 $140,000
67,840
40,704
24,422
24,422
12,211
Taxable Income Income Taxes (40%)
$110,600 44,240
$105,160 42,064
$132,296 52,918
$148,578 59,431
$148,578 59,431
$160,789 64,316
$66,360
$63,096
$79,378
$89,147
$89,147
$96,473
66,360 42,400
63,096 67,840
79,378 40,704
89,147 24,422
89,147 24,422
96,473 12,211
Net Income Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities: Investment Salvage Gains Tax Net Cash Flow
(212,000) 30,000 (12,000) ($212,000)
$108,760
$130,936
$120,082
$113,569
$113,569
$126,684
Page | 43
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
(b) Debt financing (term loan): annual installment = $212,000( A/P, 13%, 6) = $53,032 Tax Rate(%)= MARR(%)= 0
40 20
PW(i)= IRR(%)=
1
2
3
$349,000
$349,000
$349,000
$36,000 $140,000 $20,000 42,400 27,560
$36,000 $140,000
Taxable Income Income Taxes (40%) Net Income
$244,004 #NUM! 4
5
6
$349,000
$349,000
$349,000
$36,000 $140,000
$36,000 $140,000
$36,000 $140,000
$36,000 $140,000
67,840 24,249
40,704 20,507
24,422 16,278
24,422 11,500
12,211 6,101
$83,040 33,216
$80,911 32,365
$111,789 44,716
$132,299 52,920
$137,077 54,831
$154,688 61,875
$49,824
$48,547
$67,074
$79,380
$82,246
$92,813
49,824 42,400
48,547 67,840
67,074 40,704
79,380 24,422
82,246 24,422
92,813 12,211
Income Statement
Revenues (savings) Expenses: O&M costs Resin Software development Depreciation Debt Interest
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities: Investment
(212,000)
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
(b) Debt financing (term loan): annual installment = $212,000( A/P, 13%, 6) = $53,032 Tax Rate(%)= MARR(%)=
40 20
0
PW(i)= IRR(%)=
1
2
3
$349,000
$349,000
$349,000
$36,000 $140,000 $20,000 42,400 27,560
$36,000 $140,000
Taxable Income Income Taxes (40%) Net Income
$244,004 #NUM! 4
5
6
$349,000
$349,000
$349,000
$36,000 $140,000
$36,000 $140,000
$36,000 $140,000
$36,000 $140,000
67,840 24,249
40,704 20,507
24,422 16,278
24,422 11,500
12,211 6,101
$83,040 33,216
$80,911 32,365
$111,789 44,716
$132,299 52,920
$137,077 54,831
$154,688 61,875
$49,824
$48,547
$67,074
$79,380
$82,246
$92,813
49,824 42,400
48,547 67,840
67,074 40,704
79,380 24,422
82,246 24,422
92,813 12,211
Income Statement
Revenues (savings) Expenses: O&M costs Resin Software development Depreciation Debt Interest
Cash Flow Statement
Operating Activities: Net Income Depreciation Investment Activities: Investment Salvage Gains Tax Financing Activities: Borrowed Funds Principal repayment
(212,000) 30,000 (12,000) 212,000
Net Cash Flow
$0
(25,472)
(28,784)
(32,526)
(36,754)
(41,532)
(46,931)
$66,752
$87,603
$75,252
$67,048
$65,137
$76,092
Page | 44
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
(c) Lease financing (financial lease): Tax Rate(%)= MARR(%)= 0
40 20
PW(i)= IRR(%)=
$185,396 156.94%
1
2
3
4
5
6
$349,000
$349,000
$349,000
$349,000
$349,000
$349,000
$36,000 $140,000 $20,000 $62,560
$36,000 $140,000
$36,000 $140,000
$36,000 $140,000
$36,000 $140,000
$36,000 $140,000
$62,560
$62,560
$62,560
$62,560
Income Statement
Revenues (savings) Expenses: O&M costs Resin Software development Lease Payment
$62,560
$0
Taxable Income Income Taxes
($62,560) ($25,024)
$90,440 36,176
$110,440 44,176
$110,440 44,176
$110,440 44,176
$110,440 44,176
$173,000 69,200
Net Income
($37,536)
$54,264
$66,264
$66,264
$66,264
$66,264
$103,800
(37,536)
54,264
66,264
66,264
66,264
66,264
103,800
($37,536)
$54,264
$66,264
$66,264
$66,264
$66,264
$103,800
Cash Flow Statement
Operating Activities: Net Income Net Cash Flow
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
(c) Lease financing (financial lease): Tax Rate(%)= MARR(%)=
40 20
0
PW(i)= IRR(%)=
$185,396 156.94%
1
2
3
4
5
6
$349,000
$349,000
$349,000
$349,000
$349,000
$349,000
$36,000 $140,000 $20,000 $62,560
$36,000 $140,000
$36,000 $140,000
$36,000 $140,000
$36,000 $140,000
$36,000 $140,000
$62,560
$62,560
$62,560
$62,560
Income Statement
Revenues (savings) Expenses: O&M costs Resin Software development Lease Payment
$62,560
$0
Taxable Income Income Taxes
($62,560) ($25,024)
$90,440 36,176
$110,440 44,176
$110,440 44,176
$110,440 44,176
$110,440 44,176
$173,000 69,200
Net Income
($37,536)
$54,264
$66,264
$66,264
$66,264
$66,264
$103,800
(37,536)
54,264
66,264
66,264
66,264
66,264
103,800
($37,536)
$54,264
$66,264
$66,264
$66,264
$66,264
$103,800
Cash Flow Statement
Operating Activities: Net Income Net Cash Flow
(d) The best financing method is the term loan option.
Page | 45
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
ST 10.5 •
(a) The net cash flows for each alternative over 10 years: Installing AGVS: Input Data Tax Rate(%)= MARR(%)=
Output PW (9%)= ($167,864)
35 15
Financial Data
year Depreciation Book value Interest payment Principal payment O&M costs Cash Flow Statement
Investment Net proceeds from sale -(1 - 0.35) (Expenses)
0 $159,000 159,000 $20,000
1 $22,721 136,279 15,900 (26,044) $20,000
2 $38,939 97,340 13,296 (28,648) $20,000
3 $27,809 69,531 10,431 (31,513) $20,000
4 $19,859 49,672 7,280 (34,664) $20,000
5 $14,199 35,473 3,813 (38,131) $20,000
6 $14,183 21,290
7 $14,199 7,091
8 $7,091 (0)
$20,000
$20,000
$20,000
9
10 $0 (0)
$0 (0)
$20,000
$0
(all units in thousands of dollars) 0 ($159,000)
1
2
3
($13,000) ($13,000) ($13,000) ($13,000)
4
5
6
7
8
9
($13,000) ($13,000) ($13,000) ($13,000) ($13,000) ($13,000)
10
$0
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
ST 10.5 •
(a) The net cash flows for each alternative over 10 years: Installing AGVS: Input Data Tax Rate(%)= MARR(%)=
Output PW (9%)= ($167,864)
35 15
Financial Data
year Depreciation Book value Interest payment Principal payment O&M costs Cash Flow Statement
Investment Net proceeds from sale -(1 - 0.35) (Expenses) -(1 - 0.35) (Debt interest) + (0.35) (Depreciation) Borrowed funds Principal repayment Net Cash Flow
0 $159,000 159,000 $20,000
1 $22,721 136,279 15,900 (26,044) $20,000
2 $38,939 97,340 13,296 (28,648) $20,000
3 $27,809 69,531 10,431 (31,513) $20,000
4 $19,859 49,672 7,280 (34,664) $20,000
5 $14,199 35,473 3,813 (38,131) $20,000
6 $14,183 21,290
7 $14,199 7,091
8 $7,091 (0)
$20,000
$20,000
$20,000
9
10 $0 (0)
$0 (0)
$20,000
$0
(all units in thousands of dollars) 0 ($159,000)
1
2
3
4
5
6
7
8
9
10
($13,000) ($13,000) ($13,000) ($13,000) (10,335) (8,642) (6,780) 7,952 13,629 9,733 $159,000 (26,044) (28,648) (31,513)
($13,000) ($13,000) ($13,000) ($13,000) ($13,000) ($13,000) (4,732) (2,478) 6,951 4,970 4,964 4,970 2,482 0
($13,000) ($41,426) ($36,662) ($41,560)
($45,445) ($48,640)
(34,664)
$0 0
(38,131) ($8,036)
($8,030) ($10,518) ($13,000)
$0
Page | 46
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8 © 2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.
•
Leasing gas-powered lift trucks (payable at the end of each year): total annual expenses = $5,465 + $6,317 + $1,660 + $58,653 + $10,000 = $82,095 annual net cash flow = - (1 - 0.35)($82,095) = -$53,362 per year
(b) & (c) The incremental cash flows (AGVS option – Gas truck option)
