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Chapter 15 Capital-Budgeting Decision Methods of Financing 15.1 (a) Equity Financing: Let X denote denote the number of shares to be sold. The total flotation cost would be (0.06)($25) X = $1.5 X To net $10 million, 25 X − 1.5 X = $10, 000, 000 23.5 X = $10, 00 000, 00 000 X = 425,532 425,532 shares shares Flotation cost = $638,298 (b) Equity Financing: $10,000,000 ,000 0,00 ,000 0 = $193 193,68 ,680 0 − $10,00 1 − 0.019 Number of bond bond = $10,193,6 $10,193,680 80 / $1,000 = 10,194 10,194 units Annual interest = (10,194)($1,000)(0.12) = $1,223,280 Flotation cost =
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) Equal repayment of the interest: n
0 1 2 3 4 5 6
Repayment Interest Principal $45,000 $45,000 $45,000 $45,000 $45,000 $45,000
$0 $0 $0 $0 $0 $500,000
Loan Balance $500,000 $500,000 $500,000 $500,000 $500,000 $500,000 $0
(c) Equal annual installment: 000( A / P, 9% 9%, 6) 6) = $111, 46 460 A = $500, 00 n
0 1 2 3 4 5 6
Repayment Interest Principal $45,000 $39,019 $32,499 $25,392 $17,646 $9,203
$66,460 $72,441 $78,961 $86,068 $93,814 $102,257
Loan Balance $500,000 $433,540 $361,099 $282,138 $196,070 $102,257 $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.
Cash Flow Statement
Cash from operation Net Income Depreciation Investment/Salvage
$39,000
$23,400
$40,040
$57,512
$40,000
$64,000
$38,400
$11,520 $30,000
($200,000)
Gains Tax
$5,628
Net cash flow
($200,000)
PW(10%) =
$74,467
AE(10%) =
$23,492
$79,000
$87,400
$78,440
$104,660
(b) Debt Financing Income Statement (Bank A) Revenue Expenses Depreciation Interest
0
1 2 3 4 $100,000 $100,000 $100,000 $100,000 $40,000 $20,000
$64,000 $15,000
$38,400 $10,000
$11,520 $5,000
Taxable Income Income Taxes
$40,000 $14,000
$21,000 $7,350
$51,600 $18,060
$83,480 $29,218
Net Income
$26,000
$13,650
$33,540
$54,262
Cash Flow Statement Cash from operation Net Income
$26,000
$13,650
$33,540
$54,262
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.
Cash Flow Statement Cash from operation Net Income Depreciation Investment/Salvage Gains Tax Loan Repayment
$26,000 $40,000
$12,529 $64,000
$31,511 $38,400
$51,560 $11,520 ($200,000) $30,000 $5,628 $200,000 ($32,759) ($36,035) ($39,638) ($91,566) $33,241
$40,494
$30,273
3
Net cash flow PW(10%) = AE(10%) =
$0 $91,307 $28,805
(c) Best course of action: Adopt Bank B’s repayment plan 15.4 (a) The total flotation costs to raise $65 million:
• Common stock: amount of common stock = ($65,000,000)(0.45) = $29,250,000 $29,250,000 − $29, 250,000 = $1, 410,377 flotation cost = 1 − 0.046 • Preferred stock: amount of preferred stock = ($65,000,000)(0.10) = $6,500,000
$7,142
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• Preferred stock: X P (1 − 0.081)($55) = $6,500,000 X P = 128,598 shares
• Bond: X B (1 − 0.014)($980) = $29,250,000 X B = 30, 271 units
(c) Cash requirement to meet financing costs: • Common stock: annual cash dividends = ($2 / share)(958,137shares) = $1,916,274 • Preferred stock: annual cash dividends = (0.06)($15 / share)(128,598shares) = $115,738
• Bond: borrowing amount = (30,271)($1, 000) = $30,271,000
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15.6 To provide a yield to maturity of 13% to the bond investors, the bond offering price should be P = $110( P / A,13%,10) + $1, 000( P / F,13%,10)
= $891.48 Now to raise $10 million, The Sweeny would have to sell $10,000,000 = $10,193,680 1 − 0.019 Since the $1,000 bond will be sold at a 10.852% discount, the total number of bonds to be sold would be $10,193,680 = 11, 434.56. 891.48 The annual debt interest payment on after-tax basis would be 11, 434,56($1, 000)(0.11)(1 − 0.35) = $817,571
15.7 Cost of retaining earnings: k r =
$1.12 + 0.12 = 18.22% $18
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15.10 Given: k e = 0.30 (a) ie = (70 / 70)(0.30) = 0.3 id = (1 − 0.40)[(10 / 30)(0.14) + (20 / 30)(0.12)] = 0.076 k = (0.076)(0.30) + (0.3)(0.70) = 0.2328
(b) ie = r f + β ⎡ r M − r f ⎤ = 0.06 + 1.2(0.12 − 0.06) = 0.132
⎣
⎦
(c) k = (0.076)(0.30) + (0.132)(0.70) = 0.1152
15.11 Given: ie = 18%, id = (0.12)(1 − 0.36) = 0.0768 k = (0.4)(0.0768) + (0.6)(0.18) =13.87% (a) Net equity flow method: PW (18%) = $35,847 > 0 , accept the project.
Income Statement Revenue Expenses
0
1
2
3
4
5
$90,000 $90,000 $90,000 $90,000 $90,000
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) Cost of capital method: PW (13.87%) = $41, 300 > 0 , accept the project. 0
Income Statement Revenue Expenses O&M Depreciation
1
2
3
4
5
$90,000 $90,000 $90,000 $90,000 $90,000 $10,000 $10,000 $10,000 $10,000 $10,000 $28,580 $48,980 $34,980 $24,980 $8,930 .
Taxable Income Income Taxes
$51,420 $31,020 $45,020 $55,020 $71,070 $18,511 $11,167 $16,207 $19,807 $25,585
Net Income
$32,909 $19,853 $28,813 $35,213 $45,485
Cash Flow Statement Cash from operation Net Income Depreciation Investment/Salvage Gains Tax
$32,909 $19,853 $28,813 $35,213 $45,485 $28,580 $48,980 $34,980 $24,980 $8,930 ($200,000) $50,000 $1,278
Net cash flow ($200,000) $61,489 $68,833 $63,793 $60,193 $105,693 PW(13.87%) = $41,300
15.12 (a) Net equity flow method: Income Statement Revenue Expenses
0
1 2 3 4 5 $45,000 $45,000 $45,000 $45,000 $45,000
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(b) Cost of capital method: ie = 20%, id = (0.15)(1 − 0.30) = 0.105 k = (0.6)(0.105) + (0.4)(0.2) = 14.3% 0
Income Statement Revenue Expenses Depreciation
1 2 3 4 5 $45,000 $45,000 $45,000 $45,000 $45,000 $20,000 $32,000 $19,200 $11,520
$5,760
.
Taxable Income Income Taxes
$25,000 $13,000 $25,800 $33,480 $39,240 $7,500 $3,900 $7,740 $10,044 $11,772
Net Income
$17,500
$9,100 $18,060 $23,436 $27,468
Cash Flow Statement Cash from operation Net Income Depreciation Investment/Salvage Gains Tax
$17,500 $9,100 $18,060 $23,436 $27,468 $20,000 $32,000 $19,200 $11,520 $5,760 ($100,000) $30,000 ($5,544)
Net cash flow
($100,000) $37,500 $41,100 $37,260 $34,956 $57,684
PW(14.3%) =
$39,268
The project also is acceptable.
15.13 (a) Using ie = 15% : Machine A Income Statement
0
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.
Machine B Income Statement Revenue Expenses O&M Depreciation Interest (10%)
0
1 2 3 4 5 6 $28,000 $28,000 $28,000 $28,000 $28,000 $28,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $12,000 $19,200 $11,520 $6,912 $6,912 $3,456 $1,800 $1,567 $1,310 $1,028 $717 $376 .
Taxable Income Income Taxes (35%)
$4,200 ($2,767) $5,170 $1,470 ($968) $1,809
$10,060 $10,371 $14,168 $3,521 $3,630 $4,959
Net Income
$2,730 ($1,798) $3,360
$6,539
$6,741
$9,209
Cash Flow Statement Cash from operation Net Income $2,730 ($1,798) $3,360 $6,539 $6,741 $9,209 Depreciation $12,000 $19,200 $11,520 $6,912 $6,912 $3,456 Investment/Salvage ($60,000) $8,000 Gains Tax ($2,800) Loan Repayment $18,000 ($2,333) ($2,566) ($2,823) ($3,105) ($3,416) ($3,757)
Net cash flow ($42,000) $12,397 $14,835 $12,058 $10,346 $10,237 $14,108 PW(15%) = $5,030 Machine B should be better.
(b) Using k = 0.7(0.15) + 0.3(0.10)(1 − 0.35) =12.45% : Machine A
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.
Machine B Income Statement Revenue Expenses O&M Depreciation
0
1 2 3 4 5 6 $28,000 $28,000 $28,000 $28,000 $28,000 $28,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $12,000 $19,200 $11,520 $6,912 $6,912 $3,456 .
Taxable Income Income Taxes (35%)
$6,000 ($1,200) $6,480 $2,100 ($420) $2,268
$11,088 $11,088 $14,544 $3,881 $3,881 $5,090
Net Income
$3,900
$4,212
$7,207
$7,207
$9,454
Cash Flow Statement Cash from operation Net Income $3,900 ($780) $4,212 Depreciation $12,000 $19,200 $11,520 Investment/Salvage ($60,000) Gains Tax
$7,207 $6,912
$7,207 $6,912
$9,454 $3,456 $8,000 ($2,800)
Net cash flow
($780)
($60,000) $15,900 $18,420 $15,732 $14,119 $14,119 $18,110
PW(12.45%) = $5,410
Machine B should still be better.
(c) Both methods provide the same decision.
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Rate of Return 90% 5
80% 3
40% 2
32% 30% 7
6
22% 15% rate
1
Borrowing
(18%)
4
Lending (12%)
Capital budget ($ Million) 15.15 (a) Present worth analysis: With no budget restriction, select alternatives 1,2,3,4,7,13, and 14. The total NPW from the projects is $2,196. j
1
PW(8%) $303
j
8
PW(8%) -$208
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Short Case Studies ST 15.1 (a)
• Total market value = Present value of its expected future net cash flows + the value of current assets ($5M) •
Total market value =stock price per share* number of share outstanding = $18(1M) = $18M Present value of its expected future net cash flows = $13M
(b)
Income before tax = $3.5M Earnings = $2.1M Income before tax (1-tax rate) = Earnings Tax rate = 40% (c)
•
The case when the financing source is known, we use interest rate of equity ( ie ) as MARR, MARR = ie ie =
cc c
k e , since we have only one source of equity, issuing common new
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.
MARR= ie =
•
ce cc
k e = 31.93%
The case when the financing source is unknown, we use k (WACC) as MARR, MARR= k k = id
id = ie =
cd cd + ce
cs cd cc ce
+ ie
ce cd + ce
k s (1 − t m ) , interest rate of term loan after tax = 10%. k e = 0.3193% from the first case
Games Inc. intends to maintain its current debt to equity ratio when financing to purchase new equipment. Therefore, they will be financing the cost of new equipment, $10M, the amount of $4M from debt of long term debt and $6M from equity of stock. Therefore, cc = c e = $6M, cs = c d = $4M MARR = k = id
cd cd + ce
+ ie
ce cd + ce
= 21.56%
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.
Note) The income statement and cash flows of most likely case are like below: Income statement
Inflation
Revenue
10%
10%
Expense
0
1 $48,400 $38,720 $1,445 $400 $7,835 $3,134 $4,701
(1000US$) 2 $53,240 $31,944 $1,234 $400 $19,662 $7,865 $11,797
0
1
(1000US$) 2
Depreciation Debt Interest rate
Taxable income Income taxes(40%) Net income
Cash flow statement
Operating activities
Net income Depreciation
$4,701 $1,445
$11,797 $1,234
Investment activities
Investment Salvage Gains tax financing activities Borrowed funds Principal repayment Common stock Cash dividend Net cash flow(Actual $) PW=
•
-$10,000
10%
$5,929 -$557
$4,000 $6,000 $0
-$796 $5,350
-$4,000 -$6,742 -$880 $6,782
$6,534
Depreciation base: • Equipment: $10,000,000 • Installation expense: (20 employees)(40 hours per week)(2 weeks)($50 per hour) = $80,000
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.
ST 15.2 (a) There are 40 alternatives including the “do-nothing” alternative. Alternative
Projects
First year
Second year
Engineering
(j)
Selected
Expenditure
Expenditure
Hours
1
0
2
1
300,000
3
2
100,000
300,000
7,000
4
4
50,000
100,000
6,000
5
5
50,000
300,000
3,000
6
6
50,000
300,000
3,000
7
7
70,000
10,000
8
(1,4)
350,000
100,000
10,000
9
(1,7)
370,000
10,000
4,000
10
(2,4)
150,000
400,000
13,000
11
(2,7)
170,000
310,000
7,000
12
(1,6)
500,000
13
(2,6)
300,000
300,000
7,600
14
(2,5)
150,000
600,000
10,000
15
(2,3)
100,000
500,000
9,000
16
(1,5)
350,000
300,000
7,000
17
(1,4,7)
420,000
110,000
10,000
18
(1,4,6)
550,000
100,000
10,600
19
(1,4,5)
400,000
400,000
13,000
20
(1,7,6)
570,000
10,000
4,600
21
(1,7,5)
420,000
310,000
7,000
‐
‐
‐ 4,000
‐
‐
4,600
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(b) Only 17 alternatives are feasible as shown in part (a). (c) Without knowing the exact cash flow sequence for each project over the project life, it is not feasible to determine the optimal capital budget. ST 15.3 (a) Select A and C with FW(10%) = $4,894. Since there are $500 left over after selecting A and C, this left-over is lent out at 10% for 3 periods. Therefore, the total amount available for lending at the end of period 3 is calculated as follows: F = $4,894 + $500( F / P,10%, 3)
= $5,559.60 (b) Select B and C. The total amount available for lending at the end of period 3 is $5,740. (c) With a budget limit of $3,500, the reasonable MARR should be the lending rate of 10%. (You select A and C and have $500 available for lending.) ST 15.4 (a) The debt repayment schedule for the loan from the equipment manufacturer:
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) The flotation costs and the number of common stocks to raise $8,500,000: $8,500,000 flotation cost = − $8,500,000 = $749,184 1 − 0.081 $8,500,000 = 205,537 shares number of shares = (1 − 0.081)($45)
(c) The flotation costs and the number of $1,000 bonds to raise $10.5 million: $10,500,000 − $10,500,000 = $203,364 1 − 0.019 $10,500,000 number of bonds = = 11,893units (1 − 0.019)($900) flotation cost =
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ST 15.5 Income Statement Revenue Electricity Bill Excess power Expenses O&M Misc. Standby power Overhead Overhaul Depreciation Unit Inter Equipment Interest (9%)
(a) The net cash flow the cogeneration project with bond financing 0
1
2
3
4
5
6
7
8
9
10
11
12
$6,120,000 $480,000
$6,120,000 $480,000
$6,120,000 $480,000
$6,120,000 $480,000
$6,120,000 $480,000
$6,120,000 $480,000
$6,120,000 $480,000
$6,120,000 $480,000
$6,120,000 $480,000
$6,120,000 $480,000
$6,120,000 $480,000
$6,120,000 $480,000
$500,000 $1,000,000 $6,400 $1,280,000
$500,000 $1,000,000 $6,400 $1,280,000
$500,000 $1,000,000 $6,400 $1,280,000 $1,500,000
$500,000 $1,000,000 $6,400 $1,280,000
$500,000 $1,000,000 $6,400 $1,280,000
$500,000 $1,000,000 $6,400 $1,280,000 $1,500,000
$ 500,000 $1,000,000 $6,400 $1,280,000
$500,000 $1,000,000 $6,400 $1,280,000
$500,000 $1,000,000 $6,400 $1,280,000 $1,500,000
$500,000 $1,000,000 $6,400 $1,280,000
$500,000 $1,000,000 $6,400 $1,280,000
$500,000 $1,000,000 $6,400 $1,280,000
$500,000 $100,000 $1,070,370
$950,000 $160,000 $1,070,370
$855,000 $96,000 $1,070,370
$770,000 $57,600 $1,070,370
$693,000 $57,600 $1,070,370
$623,000 $28,800 $1,070,370
$590,500
$0
$0
$0
$0
$0
$1,070,370
$1,070,370
$1,070,370
$1,070,370
$1,070,370
$1,070,370
.
Taxable Income
$2,143,230
$1,633,230
$292,230
$1,915,630
$1,992,630
$591,430
$2,152,730
$2,743,230
$1,243,230
$2,743,230
$2,743,230
$2,743,230
Net Income
$1,371,667
$1,045,267
$187,027
$1,226,003
$1,275,283
$378,515
$1,377,747
$1,755,667
$795,667
$1,755,667
$1,755,667
$1,755,667
$1,371,667
$1,045,267
$187,027
$1,226,003
$1,275,283
$378,515
$1,377,747
$1,755,667
$795,667
$1,755,667
$1,755,667
$1,755,667
$500,000 $100,000
$950,000 $160,000
$855,000 $96,000
$770,000 $57,600
$693,000 $57,600
$623,000 $28,800
$ 590,500
$590,501
$590,502
$590,503
$590,504
$295,000
Cash Flow Statement Cash from operation Net Income Depreciation Unit Inter Equipment Investment/Salvage Unit Inter Equipment Gains Tax Loan Repayment
Net cash flow PW(27%) =
($10,000,000) ($500,000)
$1,000,000
$10,500,000 $0
$490,136 ($11,893,000)
$1,971,667
$2,155,267
$1,138,027
$2,053,603
$2,025,883
$1,030,315
$1,968,247
$2,346,168
$1,386,169
$2,346,170
$2,346,171
($8,352,196)
$5,879,590
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.
(b) The maximum annual lease amount that ACC is willing to pay is $1,183,771. (By Excel Goal Seek)
Income Statement Revenue Electricity Bill Excess power Expenses O&M Misc. Standby power Overhead Lease
0
1
2
3
4
5
6
7
8
9
10
11
12
$6,120,000 $480,000
$6,120,000 $480,000
$6,120,000 $480,000
$6,120,000 $480,000
$6,120,000 $480,000
$6,120,000 $6,120,000 $480,000 $480,000
$6,120,000 $480,000
$6,120,000 $480,000
$6,120,000 $480,000
$6,120,000 $480,000
$6,120,000 $480,000
$500,000 $1,000,000 $6,400 $1,280,000 $1,183,771
$500,000 $1,000,000 $6,400 $1,280,000 $1,183,771
$500,000 $1,000,000 $6,400 $1,280,000 $1,183,771
$500,000 $1,000,000 $6,400 $1,280,000 $1,183,771
$500,000 $1,000,000 $6,400 $1,280,000 $1,183,771
$500,000 $500,000 $1,000,000 $1,000,000 $6,400 $6,400 $1,280,000 $1,280,000 $1,183,771 $1,183,771
$500,000 $1,000,000 $6,400 $1,280,000 $1,183,771
$500,000 $1,000,000 $6,400 $1,280,000 $1,183,771
$500,000 $1,000,000 $6,400 $1,280,000 $1,183,771
$500,000 $1,000,000 $6,400 $1,280,000 $1,183,771
$500,000 $1,000,000 $6,400 $1,280,000 $1,183,771
.
Taxable Income Income Taxes (36%)
$2,629,829 $946,738
$2,629,829 $946,738
$2,629,829 $946,738
$2,629,829 $946,738
$2,629,829 $946,738
$2,629,829 $2,629,829 $946,738 $946,738
$2,629,829 $946,738
$2,629,829 $946,738
$2,629,829 $946,738
$2,629,829 $946,738
$2,629,829 $946,738
Net Income
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
Cash from operation Net Income
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090 $1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090 $1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
$1,683,090
Net cash flow PW(27%) =
$0 $5,879,590
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.
In case of an operating lease, the lesser is responsible for maintaining the equipment in good condition during the lease period, so we may assume that the lesser would be responsible for bearing the overhaul costs.
Page | 21
