Fundamentos de Ingenieria Economica, 2da Edicion 09

Chapter 9 Project Cash Flow Analysis
9.1)
wages paid to temporary workers: Variable cost

property taxes on factory building: Fixed cost
property taxes on administrative building: Fixed cost
sales commission: Variable cost
electricity for machinery and equipment in a plant: Variable cost
heat and air-conditioning for a plant: Fixed cost
salaries paid to design engineers: Fixed cost
regular maintenance on machinery and equipment: Fixed cost
basic raw materials used in production: Variable cost
factory fire insurance: Fixed cost
9.2)
a) 6
b) 11
c) 5 (Note: It is tempting to select 1, but the graphs are drawn on
cumulative basis)
d) 4
e) 2
f) 10
g) 3
h) 7
i) 9
9.3)
a) Incremental cost
Description
Soldering operation
Direct materials
Direct labor
Mfg. Overhead
Variable
Fixed
Unit cost
In-house
Option
$7.50
$5.00
$4.00
$3.80
$0.20
$16.50
Outsourcing
Option
$4.80
$6.00
$4.25
$3.40
$3.23
$0.20
$18.28
No. The outsourcing option would cost $1.78 more for each unit. Note
that the fixed cost of $20,000 (or $0.20 per unit based on 100,000
production volume) remains unchanged under either option.
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park.
ISBN-13: 9780132209618. 2008 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.
b) Break-even price = $4.80 - $1.78 = $3.02 per unit
9.4)
(a)
Breakeven volume =
$255, 000
= 150, 000 units
$3(0.1) + $2(0.5) + $1(0.4)
(b)
Total marginal contribution: $3(0.1) +$2(0.5) +$1(0.4) = $1.70
Operating income:
$3(20, 000) + $2(100, 000) + $1(80, 000) $255, 000 = $85, 000
(c)
Breakeven volume =
$255, 000
= 159,375
$3(0.1) + $2(0.4) + $1(0.5)
Operating income:
$3(20, 000) + $2(80, 000) + $1(100, 000) $255, 000 = $65, 000
9.5)
a) Marginal tax rates:
Without project
Taxable income
$350,000
Income taxes
$119,000
With project
$530,000
$180,200
marginal tax rate without the project = 34%

marginal tax rate with the project = 34%
b) Average tax rates:

without the project = $119,000/$350,000
= 34%
with the project = $180,200/$530,000
= 34%
9.6)
a) Marginal tax rates with the project:
2
n
1
2
3
4
5
6
Revenue
$120,000
$120,000
$120,000
$120,000
$120,000
$120,000
Depreciation Taxable income Combined income Marginal rate

$21,000
$99,000
$399,000
34%
$33,600
$86,400
$386,400
34%
$20,160
$99,840
$399,840
34%
$12,096
$107,904
$407,904
34%
$12,096
$107,904
$407,904
34%
$6,048
$113,952
$413,952
34%
b) Average tax rates

n
1
2
3
4
5
6
Combined income
$399,000
$386,400
$399,840
$407,904
$407,904
$413,952
Combined income taxes

$135,660.00
$131,376.00
$135,945.60
$138,687.36
$138,687.36
$140,743.68
Average tax rate

34%
34%
34%
34%
34%
34%
9.7)
Incremental tax rate calculation:
Year 1
Year 2
Revenue
$200,000 $200,000
Operating Costs $100,000 $100,000
Depreciation
$10,000 $16,000
Taxable income $90,000 $84,000
Year 1
$500,000
$170,000
Year 2
$500,000
$170,000
Taxable income with project

Income taxes (34%)
$590,000
$200,600
$584,000
$198,560
Incremental taxable income

Incremental income taxes
Incremental tax rate
$90,000
$30,600
34%
$84,000
$28,560
34%
Taxable income without project

Income taxes (34%)
Comments: Note that the marginal tax rates over the project life remain
unchanged because the additional income from the new project is not large
enough to push the company into a higher tax bracket.
3
9.8)
Taxable income from the project during year 1:

D1 = 0.20($100, 000) = $20, 000
Taxable income = $80, 000 $20, 000 = $60, 000
a) & b) Increment in income tax due to the project during year 1:

Income taxes
9.9)
Year 1
$195,000
$59,300

Income taxes
$255,000
$82,700

$60,000
$23,400
39%
Incremental tax calculations:

a) Additional taxable income due to project:
Annual revenue
Operating cost
Depreciation
Taxable income
Year 1
$90,000
$25,000
$16,667
$48,333
Year 2
$90,000
$25,000
$22,222
$42,778
Year 3
$90,000
$25,000
$3,704
$61,296
b) Additional income tax calculation:
Year 1
$400,000
$136,000
Year 2
$400,000
$136,000
Year 3
$400,000
$136,000

Income taxes
$448,333
$152,433
$442,778
$150,544
$461,296
$156,841

$48,333
$16,433
34%
$42,778
$14,544
34%
$61,296
$20,841
34%

Income taxes
4
9.10)
(a), (b), and (c)
Input
Tax Rate(%)=
MARR(%)=
Output
PW(i) =
IRR(%) =
40
12
$299,551 >0, acceptable

97%
Income Statement
Revenues (savings)
Expenses:
Labor
Materials
Depreciation
$300,000
$300,000
$300,000
$300,000
$300,000
$300,000
$100,000
50,000
20,000
$100,000
50,000
32,000
$100,000
50,000
19,200
$100,000
50,000
11,520
$100,000
50,000
11,520
$100,000
50,000
5,760
Taxable Income
Income Taxes (40%)
$130,000
52,000
$118,000
47,200
$130,800
52,320
$138,480
55,392
$138,480
55,392
$144,240
57,696
$78,000
$70,800
$78,480
$83,088
$83,088
$86,544
Net Income
Cash Flow Statement
Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
$
Salvage
Gains Tax
Net Cash Flow
$
$
78,000
20,000
$
$
70,800
32,000
$
$
78,480
19,200
$
$
83,088
11,520
$
$
83,088
11,520
$
$
86,544
5,760
(100,000)
0
0
($100,000)
$98,000
$102,800
$97,680
$94,608
$94,608
$92,304
9.11) Investment in industrial robot:
0
Income Statement
Revenues (savings)
Expenses:
Depreciation
$125,000
$125,000
$125,000
$125,000
$125,000
35,725
61,225
43,725
31,225
11,163
Taxable Income
Income Taxes (35%)
$89,275
31,246
$63,775
22,321
$81,275
28,446
$93,775
32,821
$113,838
39,843
Net Income
$58,029
$41,454
$52,829
$60,954
$73,994
$58,029
$35,725
$41,454
$61,225
$52,829
$43,725
$60,954
$31,225
$73,994
$11,163
Cash Flow Statement

Net Income
Depreciation
Investment
Salvage
Gains Tax
Net Cash Flow
($250,000)
$50,000
$5,928
($250,000)
$93,754
$102,679
PW(15%)=
IRR=
$95,498
29% >15%(MARR)
$96,554
$92,179
$141,085
Accept the investment
9.12)
X = $60, 000( P / A,15%,10)

= $301,128
9.13) Investment in a new trench excavator:
0
Income Statement
Revenues (savings)
Expenses:
Required annual digging (ft)
Number of hours to operate
Operating cost (@$10/hr)
Depreciation
Taxable Income
Income Taxes (35%)
Net Income
Cash Flow Statement
Net Income
Depreciation
Investment
Salvage
Gains Tax
Net Cash Flow
$50,000
$50,000
$50,000
$50,000
$50,000
8,000
500
$5,000
$60,000
8,000
500
$5,000
$96,000
8,000
500
$5,000
$57,600
8,000
500
$5,000
$34,560
8,000
500
$5,000
$17,280
($15,000)
($5,250)
($51,000)
($17,850)
($12,600)
($4,410)
$10,440
$3,654
$27,720
$9,702
($9,750)
($33,150)
($8,190)
$6,786
$18,018
($9,750)
$60,000
($33,150)
$96,000
($8,190)
$57,600
$6,786
$34,560
$18,018
$17,280
($300,000)
$100,000
($22,904)
($300,000)
$50,250
IRR=
PV(15%)= $
1.6%
(96,773) < 0
$62,850
$49,410
$41,346
BV=
$112,394
$34,560
Not Acceptable
9.14) Tucson Solar Company:

(a)
Income Statement
Revenues (savings)
Expenses:
Operating Expenses
Depreciation
$66,000
$70,000
$74,000
$80,000
$64,000
$50,000
29,000
10,800
28,400
17,280
32,000
10,368
38,800
6,221
31,000
6,221
25,000
3,110
Taxable Income
Income Taxes (35%)
$26,200
9,170
$24,320
8,512
$31,632
11,071
$34,979
12,243
$26,779
9,373
$21,890
7,661
Net Income
$17,030
$15,808
$20,561
$22,736
$17,406
$14,228
Cash Flow Statement

Net Income
Depreciation
Investment
$
Salvage
Gains Tax
Net Cash Flow
(b)
$
$
17,030
10,800
$
$
15,808
17,280
$
$
20,561
10,368
$
$
22,736
6,221
$
$
17,406
6,221
$
$
14,228
3,110
$
$
8,000
(2,800)
(54,000)
($54,000)
NPV=
$27,830
$62,469
$33,088
$30,929
AE(12%)=
$28,957
$15,194
$23,627
$22,539
AE(12%) = ( $62, 469 ) ( A / P /12%, 6)

= $15,194
9.15)
Investment in energy management system: N = 9 years
Input
Tax Rate(%) =
MARR(%) =
Output
PW(i) =
IRR(%) =
35
10
$1,998
11.19%
5-8
Income Statement
Energy Savings
Expenses:
Depreciation
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
16,665
22,225
7,405
3,705
Taxable Income
Income Taxes
($6,665)
(2,333)
($12,225)
(4,279)
$2,595
908
$6,295
2,203
$10,000
3,500
$10,000
3,500
Net Income
($4,332)
($7,946)
$1,687
$4,092
$6,500
$6,500
Cash Flow Statement

Net Income
Depreciation
Investment
Salvage
Gains Tax
Net Cash Flow
$
$
$
(4,332) $
16,665 $
(7,946) $
22,225 $
1,687
7,405
$
$
4,092
3,705
$
$
6,500
-
$
$
6,500
-
(50,000)
0
(0)
($50,000)
$12,333
$14,279
$9,092
$7,797
$6,500
$6,500
9.16) Investment decision based on after-tax IRR:

Input
Tax Rate(%) =
MARR(%) =
Output
PW(i) =
IRR(% )=
40
12
($0)
12.00%
Income Statement
Revenues (savings)
Expenses:
O&M costs
Depreciation
$130,000
$130,000
$130,000
$130,000
$130,000
$20,000
116,920
$20,000
155,928
$20,000
51,953
$20,000
25,994
$20,000
0
Taxable Income
Income Taxes (40%)
($6,920)
(2,768)
($45,928)
(18,371)
$58,047
23,219
$84,006
33,602
$110,000
44,000
Net Income
($4,152)
($27,557)
$34,828
$50,404
$66,000
Cash Flow Statement

Net Income
Depreciation
Investment
Salvage
Gains Tax
Net Cash Flow
$
$
$
(4,152) $
116,920 $
(27,557) $
155,928 $
34,828
51,953
$
$
50,404
25,994
$
$
66,000
-
(350,794)
0
0
($350,794)
$112,768
$128,371
$86,781
$76,398
$66,000
10
9.17) Investment in Mazda automatic screw machine:

Input
Tax Rate(%) =
MARR(%) =
Output
PW(i) =
IRR(%) =
40
15
$37,761
33.74%
Income Statement
Revenues (savings)
Expenses:
Depreciation
$38,780
9,817
16,825
12,016
8,581
6,135
3,064
Taxable Income
Income Taxes (40%)
$28,963
11,585
$21,955
8,782
$26,764
10,706
$30,199
12,080
$32,645
13,058
$35,716
14,286
Net Income
$17,378
$13,173
$16,059
$18,120
$19,587
$21,430
Cash Flow Statement

Net Income
Depreciation
Investment
Salvage
Gains Tax
Net Cash Flow
$
$
$
17,378
9,817
$38,780
$
$
13,173
16,825
$38,780
$
$
16,059
12,016
$38,780
$
$
18,120
8,581
$38,780
$
$
19,587
6,135
$38,780
$
$
21,430
3,064
$
$
3,500
3,505
(68,701)
($68,701)
$27,195
$29,998
$28,074
$26,700
$25,722
$31,499
Since PW(15%) > 0, accept the investment.
11
9.18)
Income Statement
0
$16,651
$16,651
$16,651
10,600
16,960
5,088
Taxable Income
Income Taxes
$6,051
$2,118
($310)
($108)
$11,563
$4,047
Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Investment / Salvage
Security Deposit
Gains Tax
$3,933
($201)
$7,516
(201) $
16,960 $
$
$
$
7,516
5,088
22,000
(1,500)
(577)
$16,759 $
32,527
Income Statement
Revenue
Expenses:
Depreciation
Net Cash Flow (actual)
$
$
$
$
(53,000)
1,500
(51,500) $
PW (10%) =
3,933 $
10,600 $
14,533
($0)
The required lease payment should be $16,651 per year, payable at the end of each year.
If the ACLC schedules each lease payment to be made at the beginning of each year, the
required lease payment should be much lower, or precisely $15,137 per year.
12
9.19) Investment decision based on after-tax IRR:

Input
Tax Rate(%) =
MARR(%) =
0
Output
PW(i) =
IRR(% )=
40
15
1
$137,306
48.13%
4
Income Statement
Revenues (savings)
Expenses:
O&M costs
Depreciation
$200,000
$200,000
$200,000
$200,000
$200,000
80,000
25,000
80,000
25,000
80,000
25,000
80,000
25,000
80,000
25,000
Taxable Income
Income Taxes (40%)
$95,000
38,000
$95,000
38,000
$95,000
38,000
$95,000
38,000
$95,000
38,000
Net Income
$57,000
$57,000
$57,000
$57,000
$57,000
57,000
25,000
57,000
25,000
57,000
25,000
57,000
25,000
57,000
25,000
Cash Flow Statement

Net Income
Depreciation
Investment
Salvage
Gains Tax
Net Cash Flow
(150,000)
25,000
0
($150,000)
$82,000
$82,000
$82,000
$82,000
$107,000
13
9.20) (a), (b), and (c)

(Unit:$000)
0
5-7
10-11
$ 84,000
$ 84,000
$ 84,000
$ 84,000
$ 140,000
$ 224,000
$ 224,000
$ 224,000
224,000
$ 45,000
$ 45,000
$ 45,000
$ 45,000
75,000
$ 120,000
$ 120,000
$ 120,000
120,000
$
529
$ 14,290
$ 1,154
$ 24,490
$ 1,154
$ 17,490
$ 1,154
$ 12,490
$
$
1,154
8,930
$
$
1,154
4,460
1,154
1,106
Taxable Income
Income Taxes (40%)
$ 24,181
$ 9,672
$ 13,356
$ 5,342
$ 20,356
$ 8,142
$ 25,356
$ 10,142
$
$
54,916
21,966
$
$
98,386
39,354
$ 102,846
$ 41,138
$ 102,846
$ 41,138
$
$
102,894
41,158
Net Income
$ 14,509
8,014
$ 12,214
$ 15,214
32,950
59,032
61,708
61,708
61,736
$ 8,014
$ 25,644
$ 12,214
$ 18,644
$ 15,214
$ 13,644
$
$
32,950
10,084
$
$
59,032
5,614
$
$
61,708
1,154
$
$
61,708
1,154
$
$
61,736
1,106
$
$
$
8,000
30,000
10,000
$
$
$
(1,050)
731
(4,004)
Income Statement
Revenue
Expenses:
Production costs
Depreciation :
Building
Equipment
Cash Flow Statement

Net Income
$ 14,509
Depreciation
$ 14,819
Land
$
(5,000)
Building
$ (45,000)
Equipment
$ (100,000)
Gains Tax
Land (35%)
Building (40%)
Equipment (40%)
Net Cash Flow
($150,000)
$29,328
PW(15%) =
$81,880
$33,658
$30,858
$28,858
IRR =
$43,034
$64,646
1,154
$62,862
$62,862
12
$106,519
24.30%
Note 1: In a strict sense, capital gains are only realized for the sale of land.
Note 2: It is assumed that the building will be disposed of at the end of December of the 12th year.
14
9.21) Investment in 3-D computerized car-styling system

Input
Tax Rate(%) =
MARR(%) =
Output
PW(i) =
IRR(%) =
40
12
$459,071
95.53%
Income Statement
Revenues (savings)
Expenses:
O&M costs
Depreciation
$350,000
$80,000
36,000
$80,000
57,600
$80,000
34,560
$80,000
20,736
$80,000
10,368
Taxable Income
Income Taxes (40%)
$234,000
93,600
$212,400
84,960
$235,440
94,176
$249,264
99,706
$259,632
103,853
Net Income
$140,400
$127,440
$141,264
$149,558
$155,779
Cash Flow Statement

Net Income
Depreciation
Investment
Salvage
Gains Tax
Net Cash Flow
$
$
$
140,400
36,000
$350,000
$
$
127,440
57,600
$350,000
$
$
141,264
34,560
$350,000
$
$
149,558
20,736
$350,000
$
$
155,779
10,368
$
$
5,000
6,294
(180,000)
($180,000)
$176,400
$185,040
$175,824
$170,294
$177,442
15
9.22)
a) Equal repayment of the principal:
n
0
1
2
3
4
5
6
Loan
Interest
$36,000
$30,000
$24,000
$18,000
$12,000
$6,000
Repayment
Loan
Principal Balance
$300,000
$50,000 $250,000
$50,000 $200,000
$50,000 $150,000
$50,000 $100,000
$50,000 $50,000
$50,000
0
b) Equal repayment of the interest:

n
0
1
2
3
4
5
6
Loan
Interest
$36,000
$36,000
$36,000
$36,000
$36,000
$36,000
Repayment
Loan
Principal Balance
$300,000
$300,000
$300,000
$300,000
$300,000
$300,000
$300,000
0
c) Equal annual installment:

A = $300, 000( A / P,12%, 6) = $72,968
n
0
1
2
3
4
5
6
Loan
Interest
$36,000
$31,564
$26,595
$26,000
$21,031
$14,798
$7,818
Repayment
Loan
Principal Balance
$300,000
$36,968 $263,032
$41,404 $221,628
$46,373 $175,255
$51,937 $123,318
$58,170 $65,148
$65,148
0
16
9.23)
Input
Tax Rate(%) =
MARR(%) =
40
15
Income Statement
Revenues (savings)
Expenses:
Operation cost
Depreciation
Debt interest
$35,000
$35,000
$5,000
6,666
2,000
$5,000
4,445
1,048
Taxable Income
Income Taxes (40%)
$21,334
8,534
$24,507
9,803
Net Income
$12,800
$14,704
Cash Flow Statement

Net Income
Depreciation
Investment
Salvage
Gains Tax
Financing Activities:
Borrowed funds
Principal repayment
Net Cash Flow
$
$
$
$
$
14,704
4,445
$
$
6,000
1,156
(20,000)
20,000
$
12,800
6,666
(9,524) $
9,942
(10,476)
15,829
Output
PW(i) =
$20,614
17
9.24)
(a), (b), and (c)
Income Statement
0
$95,000
$95,000
$95,000
$95,000
$95,000
30,000
10,800
48,000
9,100
28,800
7,196
17,280
5,063
8,640
2,675
Taxable Income
Income Taxes (35%)
$54,200
$18,970
$37,900
$13,265
$59,004
$20,651
$72,657
$25,430
$83,685
$29,290
Net Income
Cash Flow Statement
Cash from operation:
Net Income
Depreciation
Gains Tax
Loan repayment
$35,230
$24,635
$38,353
$47,227
$54,395
35,230 $
30,000 $
24,635 $
48,000 $
38,353 $
28,800 $
90,000 $ (14,167) $
(15,867) $
(17,771) $
47,227 $
17,280 $
$
$
(19,903) $
54,395
8,640
10,000
2,548
(22,292)
$56,768
$49,382
$44,603
$53,291
Income Statement
Revenue
Expenses:
Depreciation
Interest (12%)
$
$
$
$
(150,000)
($60,000)
$51,063
PW (20%) =
IRR =
$93,479
82.19%
18
9.25) Income statement approach: (a), (b), and (c)

Input
Tax Rate(% )=
MARR(%) =
40
18
Output
PW(i) =
IRR(%) =
$240,033
54.45%
(a)
Income Statement
Revenues:
Additional revenue
Labor & materials savings
Expenses:
Depreciation
Debt interest
Taxable Income
Income Taxes
Net Income
Cash Flow Statement
Net Income
Depreciation
Investment
Salvage
Gains Tax
Borrowed funds
Principal repayment
Net Cash Flow
5-7
10
$120,000
50,000
$120,000
50,000
$120,000
50,000
$120,000
50,000
$120,000
50,000
$120,000
50,000
$120,000
50,000
$120,000
50,000
50,015
22,500
97,485
38,994
$58,491
85,715
15,000
69,285
27,714
$41,571
61,215
7,500
101,285
40,514
$60,771
43,715
31,255
15,610
126,285
50,514
$75,771
138,745
55,498
$83,247
154,390
61,756
$92,634
170,000
68,000
$102,000
170,000
68,000
$102,000
58,491
50,015
41,571
85,715
60,771
61,215
75,771
43,715
83,247
31,255
92,634
15,610
102,000
-
102,000
-
(350,000)
20,000
(8,000)
250,000
($100,000)
(83,333)
(83,333)
(83,333)
$25,173
$43,953
$38,653
$119,486
$114,502
$108,244
$102,000
19
$114,000
9.26) (a) and (b)
Input
Tax Rate(%) =
MARR(%) =
0
Output
35
18
PW(i) = ($1,318,770)
AE(i)= ($421,713.40)
Income Statement
Revenues (savings)
Expenses:
Depreciation
Debt interest (10%)
$285,800
80,000
$489,800
66,896
$349,800
52,482
$249,800
36,626
$89,300
19,185
Taxable Income
Income Taxes (35%)
(365,800)
(128,030)
(556,696)
(194,844)
(402,282)
(140,799)
(286,426)
(100,249)
(108,485)
(37,970)
Net Income
($237,770)
($361,853)
($261,483)
($186,177)
($70,515)
(237,770)
285,800
(361,853)
489,800
(261,483)
349,800
(186,177)
249,800
(70,515)
89,300
Cash Flow Statement

Net Income
Depreciation
Investment
Salvage
Gains Tax
Borrowed funds
Principal repayment
Net Cash Flow
(2,000,000)
200,000
117,425
800,000
$ (1,200,000) $
(131,038)
(144,142)
(158,556)
(174,412)
(191,853)
(83,008) $
(16,194) $
(70,239) $
(110,789) $
144,357
(c) This is a service project. The equivalent annual cost is

AEC(18%) = $1,318,770( A / P,18%,5)
= $421,713.40
20
9.27)
(a) and (b)
Input
Tax Rate(%) =
MARR(%) =
0
Output
PW(i) =
IRR(%) =
40
14
1
$75,616
43.24%
4
Income Statement
Revenues (savings)
Expenses:
O&M cost
Depreciation
Debt interest (10%)
$60,000
$60,000
$60,000
$60,000
$60,000
$60,000
$60,000
$60,000
8,000
15,719
4,000
8,000
26,939
3,650
8,000
19,239
3,265
8,000
13,739
2,842
8,000
9,823
2,377
8,000
9,812
1,865
8,000
9,823
1,301
8,000
4,906
682
Taxable Income
Income Taxes (40%)
32,281
12,912
21,411
8,564
29,496
11,798
35,419
14,168
39,800
15,920
40,323
16,129
40,876
16,350
46,412
18,565
$19,369
$12,846
$17,697
$21,251
$23,880
$24,194
$24,525
$27,847
19,369
15,719
12,846
26,939
17,697
19,239
21,251
13,739
23,880
9,823
24,194
9,812
24,525
9,823
27,847
4,906
Net Income
Cash Flow Statement
Net Income
Depreciation
Investment
Salvage
Gains Tax
Borrowed funds
Principal repayment
(110,000)
Net Cash Flow
($70,000)
10,000
(4,000)
40,000
(3,498)
$31,590
(3,848)
$35,938
(4,232)
$32,704
(4,656)
$30,335
(5,121)
$28,582
(5,633)
$28,373
(6,196)
$28,152
(6,816)
$31,937
21
9.28) (a) with no borrowed funds:

Input
Tax Rate(%) =
MARR(%) =
0
Income Statement
Revenues (savings)
Expenses:
Depreciation
Debt interest
Taxable Income
Income Taxes (35%)
Net Income
Cash Flow Statement
Net Income
Depreciation
Investment
Salvage
Gains Tax
Borrowed funds
Principal repayment
Net Cash Flow
(b) With borrowed funds:
Output
PW(i) =
35
9
2
$9,403
$7,500
$7,500
$7,500
$7,500
$7,500
3,000
-
4,800
-
2,880
-
1,728
-
864
-
4,500
1,575
2,700
945
4,620
1,617
5,772
2,020
6,636
2,323
$2,925
$1,755
$3,003
$3,752
$4,313
2,925
3,000
1,755
4,800
3,003
2,880
3,752
1,728
4,313
864
(15,000)
3,000
(445)
-
($15,000)
$5,925
$6,555
$5,883
$5,480
$7,732
22
Input
Tax Rate(%) =
MARR(%) =
0
Taxable Income
Income Taxes (35%)
Net Income
Cash Flow Statement
Net Income
Depreciation
Investment
Salvage
Gains Tax
Borrowed funds
Principal repayment
Net Cash Flow
35
9
1
Income Statement
Revenues (savings)
Expenses:
Depreciation
Debt interest (9%)
Output
PW(9%) =
$10,629
$7,500
$7,500
$7,500
$7,500
$7,500
3,000
1,350
4,800
1,124
2,880
879
1,728
611
864
318
3,150
1,103
1,576
552
3,741
1,309
5,161
1,806
6,318
2,211
$2,048
$1,024
$2,432
$3,355
$4,107
2,048
3,000
1,024
4,800
2,432
2,880
3,355
1,728
4,107
864
(15,000)
3,000
(445)
15,000
$0
(2,506)
(2,732)
(2,978)
(3,246)
(3,538)
$2,542
$3,092
$2,334
$1,837
$3,988
(c) Which alternative to choose? The debt financing option is more attractive.
23
9.29) Net cash flow

Input
Tax Rate(%) =
MARR(%) =
0
Income Statement
Revenues (savings)
Expenses:
Depreciation
Debt interest (10%)
Taxable Income
Income Taxes (40%)
Net Income
Cash Flow Statement
Net Income
Depreciation
Investment
Salvage
Gains Tax
Borrowed funds
Principal repayment
Output
PW(12%) =
40
12
$77,275
$60,000
$60,000
$60,000
$60,000
$60,000
25,000
12,500
40,000
10,453
24,000
8,200
14,400
5,723
7,200
2,998
22,500
9,000
9,547
3,819
27,800
11,120
39,877
15,951
49,802
19,921
$13,500
$5,728
$16,680
$23,926
$29,881
13,500
25,000
5,728
40,000
16,680
24,000
23,926
14,400
29,881
7,200
(125,000)
50,000
(14,240)
125,000
Net Cash Flow
$0
(20,475)
(22,522)
(24,774)
(27,252)
(29,977)
$18,025
$23,206
$15,906
$11,074
$42,864
9.30)
PW(18%) = $3,500 + $6,343( P / F ,18%,1) + " + $9, 454( P / F ,18%,15)
= $22,134 > 0
Accept the investment.
24
(unit: $000)
Income Statement
Revenues (savings)
Expenses:
O&M
Depreciation
Debt interest (9%)
Taxable Income
Income Taxes (38%)
Net Income
Cash Flow Statement
Net Income
Depreciation
Investment
Borrowed funds
Principal repayment
Net Cash Flow
$40,000
$40,000
$40,000
$40,000
$40,000
$40,000
$40,000
$30,000
5,002
2,835
$30,000
8,572
2,835
$30,000
6,122
2,835
$30,000
4,375
2,835
$30,000
3,122
2,835
$30,000 $30,000
3126
3,122
2,835
2,835
2,163
822
(1,407)
(535)
1,043
396
2,790
1,060
4,043
1,536
4,039
1,535
4,043
1,536
$1,341
($872)
$647
$1,730
$2,507
$2,504
$2,507
1,341
5,002
(872)
8,572
647
6,122
1,730
4,375
2,507
3,122
2,504
3,126
2,507
3,122
$6,769
$6,105
$5,629
$5,630
$5,629
(35,000)
31,500
($3,500)
8
$6,343
$7,700
10
11
12
13
14
15
$40,000
$40,000
$40,000
$40,000
$40,000
$40,000
$40,000
$40,000
30,000
1,561
2,835
30,000
30,000
30,000
30,000
30,000
30,000
30,000
2,835
2,835
5,604
2,130
7,165
2,723
7,165
2,723
10,000
3,800
10,000
3,800
10,000
3,800
10,000
3,800
10,000
3,800
Net Income
Cash Flow Statement
Net Income
Depreciation
Investment
Salvage
Gains Tax
Borrowed funds
Principal repayment
$3,474
$4,442
$4,442
$6,200
$6,200
$6,200
$6,200
$6,200
3,474
1,561
4,442
4,442
6,200
6,200
6,200
6,200
6,200
Net Cash Flow
$5,035
Income Statement
Revenues (savings)
Expenses:
O&M
Depreciation
Debt interest (9%)
Taxable Income
Income Taxes (38%)
5250
(1,996)
(31,500)
$4,442 ($27,058)
$6,200
$6,200
$6,200
$6,200
$9,454
25
9.31)
Option 1: Lease (a lease paid at the start of each period)
PW(12%)lease = $144, 000(1 0.40) (1 + ( P / A,12%, 29) )

= $779, 484
Option 2: Purchase
-
Note 1: It is assumed that the property is placed in service during

January.
D1 & D30 = (11.5 /12)(1/ 39)($650, 000) = $15,972

D2 to D29 = (12 /12)(1/ 39)($650, 000) = $16, 667
-
Note 2: Property tax calculation:

($800,000)(0.05) = $40,000
Input
Tax Rate(% )=
MARR(%) =
40
12
Income Statement
Revenues:
Expenses:
Depreciation
Property tax
Taxable Income
Income Taxes
Net Income
Cash Flow Statement
Net Income
Depreciation
Investment (land)
Investment (structure)
Salvage
Gains Tax
Net Cash Flow
$
$
$
$
$
$
$
15,972
40,000
(55,972)
(22,389)
(33,583)
Output
PW(i) = ($931,551)
$
$
$
$
$
16,667
40,000
(56,667)
(22,667)
(34,000)
$
$
$
$
$
16,667
40,000
(56,667)
(22,667)
(34,000)
4-- 28
$
$
$
$
$
16,667
40,000
(56,667)
(22,667)
(34,000)
29
$
$
$
$
$
16,667
40,000
(56,667)
(22,667)
(34,000)
30
$
$
$
$
$
15,972
40,000
(55,972)
(22,389)
(33,583)
$ (33,583) $ (34,000) $ (34,000) $ (34,000) $

$ 15,972 $ 16,667 $ 16,667 $ 16,667 $
(34,000) $ (33,583)
16,667 $ 15,972
(800,000) $ (17,611) $ (17,333) $ (17,333) $ (17,333) $
$ 215,000
$ 34,556
(17,333) $ 231,944
(150,000)
(650,000)
26
PW(12%) purchase = $931,551
Option 3: Remodel
-
Note 1: Depreciation base: Remodeling cost = $300,000

D1 & D30 = (11.5 /12)(1/ 39)($300, 000) = $7,372
D2 to D29 = (12 /12)(1/ 39)($300, 000) = $7, 692

-
Note 2: Cost basis for property tax calculation:

Land + building + remodeling cost = $660,000
Income Statement
Revenues:
Expenses:
Depreciation
Property tax
Lease fee (Parking lot)
Taxable Income
Income tax
Net Income
Cash Flow Statement
Net Income
Depreciation
Investment (Remodeling)
Input
Tax Rate(% )=
MARR(%) =
40
12
$ 7,372 $ 7,692
$ 33,000 $ 33,000
$9,000
$9,500
$ (49,372) $ (50,192)
$ (19,749) $ (20,077)
$ (29,623) $ (30,115)
$ 7,692 $
$ 33,000 $
$10,000
$ (50,692) $
$ (20,277) $
$ (30,415) $
7,692
33,000
$10,500
(51,192)
(20,477)
(30,715)
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) $ (38,215) $ (38,323)

$ 7,372 $ 7,692 $ 7,692 $ 7,692 $ 7,692 $ 7,372
$
(300,000)
$ 30,000
$ 15,949
(300,000) $ (22,251) $ (22,423) $ (22,723) $ (23,023) $ (30,523) $ 14,997
Salvage
Net Cash Flow
Output
PW(i) = ($494,425)
PW(12%)remodel = $494,425
Option 3 is the least costly alternative.
27
9.32) Comparison by annual equivalent cost (all units in thousand dollars):

Plant A Plant B
Book Value (n = 20)
Salvage Value
Taxable gains
Gains tax (39%)
$380.61 $423.80
Plant C
$470.56
$853.00 $949.80 $1,054.60

$472.39
$526
$584.04
$184.23 $205.14
$227.78
Net Proceeds from sale $668.77 $744.66
$826.82
Plant A
Capital recovery cost with return:
A1 = ($8,530 $668.77)( A / P,12%,20) + $668.77(0.12) = $1,132.70
After-tax O&M cost:
A2 = (1 0.39)($1,964) = $1,198.04
Depreciation tax shield:
A3 = 0.39($8,530) [ 0.0375( P / F ,12%,1) + "] ( A / P,12%, 20)

= $172.22
Total equivalent annual cost:

A = $1,132.70 + $1,198.04 $172.22 = $2,158.52
Unit cost:
$2,158,520
= $0.04317 / kWh
50,000,000kWh
Plant B
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
28
A3 = 0.39($9, 498) [ 0.0375( P / F ,12%,1) + "] ( A / P,12%, 20)

= $191.76

A = $1, 261.25 + $1, 063.84 $191.76 = $2,133.33
Unit cost:
$2,133,330
= $0.04267 / kWh
50, 000, 000kWh
Plant C
A1 = ($10,546 $826.82)( A / P,12%, 20) + $826.82(0.12) = $1, 400.41
After-tax O&M cost:
A2 = (1 0.39)($1, 632) = $995.52
A3 = 0.39($10,546) [0.0375( P / F ,12%,1) + "] ( A / P,12%, 20)

= $212.92

A = $1, 400.41 + $1,995.52 $212.92 = $3,183.01
Unit cost:
$3,183, 010
= $0.06366 / kWh
50, 000, 000kWh
Plant B is the most economical.
29
9.33)
(a) H&Hs cost of leasing in present worth:
after-tax lease expense = (1 - 0.40)($11,000)

= $6,600
PW(15%)lease = $6, 600 $6, 600( P / A,15%,3)
= $21, 670
(b) H&Hs cost of owning in present worth:
PW of after-tax maintenance expenses:
P1 = $1, 200(1 0.40)( P / A,15%, 4)

= $2, 055
PW of after-tax loan repayment

P2 = $13,169( P / A,15%, 4)
= $37,597
PW of tax credit (shield) on depreciation and interest:

n
Dn
In
Combined Tax Savings
1
$8, 000 $4,800 $12,800(0.40) = $5,120
2 $12,800 $3, 796 $16,596(0.40) = $6, 638
3
4
$7, 680
$2,304
$2, 671 $10,351(0.40) = $4,140

$1, 411 $3, 715(0.40) = $1, 486
P3 = $5,120( P / F ,15%,1) + $6, 638( P / F ,15%, 2)

+$4,140( P / F ,15%,3) + $1, 486( P / F ,15%, 4)
= $13, 043
PW of net proceeds from sale:
30
total depreciation amount = $30,784

book value = $9,216
taxable gain = $10,000 - $9,216
= $784
gains tax = (0.40)($784) = $314
net proceeds from sale = $10,000 - $314
= $9,686
P4 = $9,686(P / F ,15%, 4)
= $5,538
PW (15%) buy = P1 + P2 + P3 + P4 = $21, 071
(c) Should the truck be leased or purchased? The borrowbuy option is a better
choice.
Input
Tax Rate(%) =
MARR(%) =
0
Output
PW(15%) = ($21,072)
40
15
1
Income Statement
Revenues (savings)
Expenses:
O&M
Depreciation
Debt interest (12%)
$1,200
8,000
4,800
$1,200
12,800
3,796
$1,200
7,680
2,671
$1,200
2,304
1,411
Taxable Income
Income Taxes (40%)
(14,000)
(5,600)
(17,796)
(7,118)
(11,551)
(4,620)
(4,915)
(1,966)
Net Income
($8,400) ($10,678)
($6,931)
($2,949)
(6,931)
7,680
(2,949)
2,304
Cash Flow Statement

Net Income
Depreciation
Investment
Salvage
Gains Tax
Borrowed funds
Principal repayment
Net Cash Flow
(8,400)
8,000
(10,678)
12,800
(40,000)
10,000
(314)
40,000
$0
(8,369)
(9,374)
(10,499)
(11,758)
($8,769)
($7,252)
($9,750)
($2,717)
31
9.34) Note: Since the operating revenues will be the same for both options, we will only
consider the cost of ownership.
(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

n
Dn
In
1 $24,000 $12,000
2 $38,400 $9,414

$36,000(0.40) = $14,400
$47,817(0.40) = $19,126
3 $23,040
4 $6,912
$29,610(0.40) = $11,844
$10,353(0.40) = $4,141
$6,570
$3,441
P3 = $14, 400( P / F ,15%,1) + $19,126( P / F ,15%, 2)
+$11,844( P / F ,15%,3) + $4,141( P / F ,15%, 4)

= $37,139

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 = $143, 406
32
Input
Tax Rate(%) =
MARR(%) =
Output
PW(15%) = ($143,405)
40
15
Income Statement
Revenues (savings)
Expenses:
O&M
Depreciation
Debt interest (10%)
$0
$0
$0
$0
$50,000
24,000
12,000
$50,000
38,400
9,414
$50,000
23,040
6,570
$50,000
6,912
3,441
Taxable Income
Income Taxes (40%)
(86,000)
(34,400)
(97,814)
(39,126)
(79,610)
(31,844)
(60,353)
(24,141)
($47,766)
($36,212)
(47,766)
23,040
(36,212)
6,912
Net Income
($51,600) ($58,688)
Cash Flow Statement

Net Income
Depreciation
Investment
Salvage
Gains Tax
Borrowed funds
Principal repayment
Net Cash Flow
(51,600)
24,000
(58,688)
38,400
(120,000)
20,000
3,059
120,000
(25,857)
(28,442)
$0 ($53,457) ($48,730)
(31,286)
(34,415)
($56,012)
($40,656)
(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
33
P2 = $44, 000(1 0.40) + $44, 000(1 0.40)( P / A,15%,3)

= $86, 677
P = P1 + P2
= $155,196
(c) Should ICI buy or lease the equipment? The buying option is a better choice.
9.35)
(a) OMC PW cost of leasing (payments at start of year):
PW(15%)leasing = $22, 000(0.60)( P / A,15%,3)*(1.15)

=$34,658.98
(b) OMC PW cost of owning:
PW of after-tax maintenance expenses:

P1 = $6, 000(1 0.40)( P / A,15%,3)
= $8, 219.52
PW cost of after-tax loan repayment:

P2 = $40,386( P / A,15%,3)
= $92, 209.32

n
Dn
In
1 $13,861 $11,640 $25,501(0.40) = $10,200

2 $23,755 $8,191 $31,946(0.40) = $12,778
3
$8,483
$4,327
$12,810(0.40) = $5,124
P3 = $10,200( P / F,15%,1) + $12,778( P / F,15%,2)

+$5,124(P / F,15%,3)
= $21,901
34

book value = $50,901
taxable loss = $45,000 - $50,901 = -$5,901
tax credit = (0.40)($5,901) = $2,360
net proceeds from sale = $45,000 + $2,360
= $47,360
P4 = $47,360(P / F,15%,3)
= $31,140
PW(15%) buy = P1 + P2 P3 P4 = $47,387.84
Input
Tax Rate(%) =
MARR(%) =
0
Income Statement
Revenues (savings)
Expenses:
O&M
Depreciation
Debt interest (12%)
$0
$0
$0
$6,000
13,861
11,640
$6,000
23,755
8,191
$6,000
8,483
4,327
Taxable Income
Income Taxes (40%)
(31,501)
(12,600)
(37,946)
(15,178)
(18,810)
(7,524)
Net Income
Cash Flow Statement
Net Income
Depreciation
Investment
Salvage
Gains Tax
Borrowed funds
Principal repayment
Net Cash Flow
9.36)
Output
PW(15%) = ($47,388)
40
15
(a) and (b)
($18,901) ($22,768) ($11,286)
(18,901)
13,861
(22,768)
23,755
(11,286)
8,483
(97,000)
45,000
2,360
97,000
(28,746)
$0
(32,195)
($33,786) ($31,208)
(36,059)
$8,498
35
0
Income Statement
Revenue
Expenses:
O&M
Depreciation
Interest
$114,000
$114,000
$56,490
$11,000
$5,000
$59,315
$8,800
$2,619
Taxable Income
Income Taxes(40%)
$41,510
$16,604
$43,266
$17,306
Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Gains Tax
Loan repayment
$24,906
$25,960
$24,906
$11,000
($23,810)
$25,960
$8,800
$29,768
$2,173
($26,190)
$12,096
$11,520
$40,510
$36,743

Net Cash Flow (constant)
($55,000)
$50,000
($5,000)
($5,000)
PW (18%) = $
IRR' (%)
=
34,345
309.75%
Sample calculation:
O & M Expense in year 1: $53,800(1 + 0.05) = $56,490

2
Salvage value in year 2: $27,000(1 + 0.05) = $29,768
Note that both depreciation and interest expenses are not responsive to
inflation.
36
9.37)
(a) and (b)

(a) Project Cash Flows with Inflation
0
Income Statement
Revenue
Expenses:
O&M
Depreciation
Interest
Taxable Income
Income Taxes (40%)
Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Cash from investing activities:
Gains Tax
Working Capital
Cash from financing activities:
Loan repayment
PW (18%) =
$162,750
$170,888
$179,432
$188,403
$197,824
$207,715
92,400
26,000
11,700
97,020
41,600
11,700
101,871
24,960
106,965
14,976
112,313
14,976
117,928
7,488
32,650
13,060
20,568
8,227
52,601
21,040
66,463
26,585
70,535
28,214
82,298
32,919
$19,590
$12,341
$31,561
$39,878
$42,321
$49,379
19,590
26,000
12,341
41,600
31,561
24,960
39,878
14,976
42,321
14,976
49,379
7,488
(130,000)
26,802
(10,721)
130,000
$0
(130,000)
$45,590
($76,060)
$56,521
$54,854
$57,297
$72,948
$98,771
37
(b) Income Statement (without inflation)

0
Income Statement
Revenue
Expenses:
O&M
Depreciation
Interest
$155,000
$155,000
$155,000
$155,000
$155,000
$155,000
$88,000
$26,000
$11,700
$88,000
$41,600
$11,700
$88,000
$24,960
$88,000
$14,976
$88,000
$14,976
$88,000
$7,488
Taxable Income
Income Taxes
$29,300
$11,720
$13,700
$5,480
$42,040
$16,816
$52,024
$20,810
$52,024
$20,810
$59,512
$23,805
Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Gains Tax
Working Capital
Loan repayment
$17,580
$8,220
$25,224
$31,214
$31,214
$35,707
$17,580
$26,000
$8,220
$41,600
$25,224
$24,960
$31,214
$14,976
$31,214
$14,976
$35,707
$7,488
$20,000
($8,000)
$50,184
$46,190
$46,190
$55,195

PW (12.38%) =
($130,000)
$130,000
$0
($130,000)
$43,580
($80,180)
$92,781
38
(c) Present value gain (or loss) due to inflation:
0.18 0.05
= 12.38%
1 + 0.05
= $92, 781
i =
PW(12.38%) no inflation
PW(18%) with inflation = $98, 771

present value gain = $98, 771 - $92, 781
=$5,990
(d) Present value gain due to borrowing:
n
0
1
2
Net Financing cost

Principal
Interest(A/T)
$130,000
-$7,020
-$130,000
-$7,020
NET
Loan flow
$130,000
-$7,020
-$137,020
Note: Interest payment (before tax) = $130,000(0.09) = $11,700

Interest payment (after-tax) = $11,700(1 0.40) = $7,020
PW(18%) Loan = $130, 000 $7, 020( P / F ,18%,1)

$137, 020( P / F ,18%, 2)
= $25, 642.79
39
9.38) (a), (b)

0
Income Statement
Revenue (Savings)
Expenses:
O&M
Depreciation
Interest
inflation
5%
$84,000
$88,200
$92,610
$21,435
$36,735
$13,118
Taxable Income
Income Taxes (40%)
$62,565
$25,026
$51,465
$20,586
$79,493
$31,797
Net Income
$37,539
$30,879
$47,696
$37,539
$21,435
$30,879
$36,735
$47,696
$13,118
Cash Flow Statement

Cash from operation
Net Income
Depreciation
Cash from investing activities:
Gains Tax
Working capital
Cash from financing activities:
Loan repayment
($150,000)
8%

($10,000)
($800)
($864)
$80,000
($515)
$11,664
($160,000)
($160,000)
$58,174
$54,881
$66,750
$59,407
$151,962
$127,590
PW (20%) =
$
PW (13.21%) = $
22,773
22,765 rounding error
Accept the project.
(c). The project is acceptable
40
9.39)
$33,000
$36,300
$39,930
$43,923
11,000
10,000
12,100
10,000
13,310
10,000
14,641
10,000
Taxable Income
Income Taxes
12,000
6,000
14,200
7,100
16,620
8,310
19,282
9,641
Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Gains Tax
$6,000
$7,100
$8,310
$9,641
6,000
10,000
7,100
10,000
8,310
10,000
9,641
10,000
($40,000) $16,000
($40,000) $14,545
$17,100
$14,132
$18,310
$13,757
$19,641
$13,415
Income Statement
Revenue
Expenses:
O&M
Depreciation

(40,000)
IRR'(%) =
15.06%
41
9.40)
0
Income Statement
Revenue
Expenses:
O&M
Depreciation
$20,000 $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 $20,000

$ 8,000 $ 8,000 $ 8,000 $ 8,000 $ 8,000 $ 8,000 $ 8,000 $ 8,000
$ 7,145 $ 12,245 $ 8,745 $ 6,245 $ 4,465 $ 4,460 $ 4,465 $ 2,230
Taxable Income
Income Taxes
$4,855
$1,699
($245) $3,255
($86) $1,139
$5,755
$2,014
$7,535
$2,637
$7,540
$2,639
$7,535
$2,637
$9,770
$3,420
Net Income
$3,156
($159) $2,116
$3,741
$4,898
$4,901
$4,898
$6,351
Cash Flow Statement

Cash from operation
Net Income
Depreciation
Gains Tax
Working capital
Net Cash Flow
$ 3,156 $ (159) $ 2,116 $ 3,741 $ 4,898 $ 4,901 $ 4,898 $

$ 7,145 $ 12,245 $ 8,745 $ 6,245 $ 4,465 $ 4,460 $ 4,465 $
$ (50,000)
$
$
$ (10,000)
$
($60,000) $10,301 $12,086 $10,861
PW (18%)=
($14,523)
IRR(%) =
$9,986
$9,363
$9,361
6,351
2,230
5,000
(1,750)
10,000
$9,363 $21,831
10.18%
42
(b) Project's IRR with inflation
Income Statement (no inflation)

0
Income Statement
Revenue
Expenses:
O&M
Depreciation
$21,600 $23,328 $25,194 $27,210 $29,387 $31,737 $34,276 $37,019

8,480
7,145
8,989
12,245
9,528
8,745
10,100
6,245
10,706
4,465
11,348
4,460
12,029
4,465
12,751
2,230
Taxable Income
Income Taxes
5,975
2,091
2,094
733
6,921
2,422
10,865
3,803
14,216
4,976
15,929
5,575
17,782
6,224
22,038
7,713
Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Gains Tax
Working capital
Loan repayment
$3,884
$1,361
$4,499
$7,062
$9,240 $10,354 $11,559 $14,325
3,884
7,145
1,361
12,245
4,499
8,745
7,062
6,245
9,240
4,465
10,354
4,460
11,559
4,465
(800)
(864)
(933)
(1,008)
(1,088)
(1,175)
(1,269)
(50,000)
(10,000)
Net Cash Flow (actual dollars)

($60,000)
Net Cash Flow (constant dollars) ($60,000)
$10,229 $12,742 $12,311 $12,299 $12,617 $13,639 $14,754 $38,495

$9,741 $11,558 $10,635 $10,119 $9,885 $10,178 $10,485 $26,054
PW (12.38%)= ($2,902.01)
9.41)
IRR' (%)=
11.11% < 12.38%, so it is not acceptable.
(a) Real after-tax yield on bond investment:
Nontaxable municipal bond:
imunicipal
=
14,325
2,230
7,387
(2,585)
17,138
0.09 0.03
= 5.825%
1 + 0.03
43
Taxable corporate bond:
imunicipal
=
0.12(1 0.3) 0.03

= 5.245%
1 + 0.03
(b) Given i = 6%, and f = 3%
isavings
= 2.91%
Since imunicipal
> 2.91% and icorporate
> 2.91% , both bond investments are better
than the savings account. Now to compare two mutually exclusive bond
investment alternatives, we need to perform an incremental analysis.
n
0
1
2
3
4
5
After- tax Cash F low

Municipal Corporate Incremental
-$10,000 -$10,000
$0
$900
$840
-$60
$900
$840
-$60
$900
$840
-$60
$900
$840
-$60
$900
$840
-$60
We cannot find the rate of return on incremental investment, as returns from

municipal bond dominate those from corporate bond in every year. Municipal
bond is a clear choice for any value of MARR.
44
9.42) (a), (b), and (c)

Engine A
0
Income Statement
Revenue
Expenses:
O&M
Depreciation
$135,000
12,000
$145,800
12,000
$157,464
12,000
$170,061
12,000
$183,666
12,000
Taxable Income
Income Taxes
(147,000)
(58,800)
(157,800)
(63,120)
(169,464)
(67,786)
(182,061)
(72,824)
(195,666)
(78,266)
Net Income
($88,200)
($94,680)
($101,678)
($109,237)
($117,400)
(88,200)
12,000
(94,680)
12,000
(101,678)
12,000
(109,237)
12,000
(117,400)
12,000
40,000
$0
($100,000)
($76,200)
($82,680)
($89,678)
($97,237)
($65,400)
PW (20%) =
($345,989)
AE (20%) =
($115,692)
FW (20%) =
($860,932)
Cash Flow Statement

Cash from operation
Net Income
Depreciation
Gains Tax
Net Cash Flow
(100,000)
Engine B
0
Income Statement
Revenue
Expenses:
O&M
Depreciation
$86,400
24,000
$93,312
24,000
$100,777
24,000
$108,839
24,000
$117,546
24,000
Taxable Income
Income Taxes
(110,400)
(44,160)
(117,312)
(46,925)
(124,777)
(49,911)
(132,839)
(53,136)
(141,546)
(56,618)
Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Gains Tax
($66,240)
($70,387)
($74,866)
($79,703)
($84,928)
(66,240)
24,000
(70,387)
24,000
(74,866)
24,000
(79,703)
24,000
(84,928)
24,000
80,000
0
($200,000)
($42,240)
($46,387)
($50,866)
($55,703)
$19,072
PW (20%)=
($316,048)
AE (20%)=
($105,680)
FW (20%)=
Net Cash Flow
(200,000)
($786,429)
Select B.
45
9.43) (a) & (b) Actual and constant dollar analysis:
Income Statement
Revenue
Expenses:
O&M
Depreciation
$126,000
$132,300
62,400
12,000
64,896
9,600
Taxable Income
Income Taxes
51,600
15,480
57,804
17,341
Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Working capital
Gains Tax
36,120
40,463
36,120
12,000
40,463
9,600
40,000
5,200
(480)
(60,000)
(5,000)

($65,000)
($65,000)
IRR'(%)
(200)
$47,920
$44,370
$94,783
$81,261
51.04%
(c) Given f = 8%, i = 15%
i =
0.15 0.08
= 6.48% (Inflation-free MARR)
1 + 0.08
Since IRR> 6.48%, the project is a profitable one.
46
9.44)
(a) & (b) Project cash flows in actual and constant dollars:
0
Income Statement
Revenue
Expenses:
O&M
Depreciation
Interest
$84,800
$89,888
$95,281
$100,998
$107,058
$113,482
$20,000
$32,000
$19,200
$11,520
$11,520
$5,760
Taxable Income
Income Taxes
$64,800
$25,920
$57,888
$23,155
$76,081
$30,432
$89,478
$35,791
$95,538
$38,215
$107,722
$43,089
Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Gains Tax
Working capital
Loan repayment
$38,880
$34,733
$45,649
$53,687
$57,323
$64,633
$38,880
$20,000
$34,733
$32,000
$45,649
$19,200
$53,687
$11,520
$57,323
$11,520
$64,633
$5,760
$42,556
($17,022)
$58,880
$55,547
$66,733
$59,392
$64,849
$54,448
$65,207
$51,650
$68,843
$51,443
$95,927
$67,625
Net Cash Flow (actual $)

Net Cash Flow (constant $)
($100,000)
($100,000)
($100,000)
PW (18%) =
IRR'(%) =
$136,553
51.53%
47
(c) The effects of project financing under inflation:

(c) Income Statement
0
$95,281
$100,998
$107,058
$113,482
$32,000
$10,521
$19,200
$8,865
$11,520
$7,010
$11,520
$4,933
$5,760
$2,606
$52,800
$21,120
$47,367
$18,947
$67,216
$26,886
$82,468
$32,987
$90,605
$36,242
$105,116
$42,046
$31,680
$28,420
$40,330
$49,481
$54,363
$63,070
$31,680
$20,000
$28,420
$32,000
$40,330
$19,200
$49,481
$11,520
$54,363
$11,520
$63,070
$5,760
$42,556
($17,022)
($12,323)
($13,801)
($15,457)
($17,312)
($19,390)
($21,717)
$39,357
$37,130
$46,619
$41,491
$44,072
$37,004
$43,688
$34,605
$46,493
$34,743
$72,646
$51,213
Income Statement
Revenue
Expenses:
O&M
Depreciation
Interest
$84,800
$89,888
$20,000
$12,000
Taxable Income
Income Taxes
Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Gains Tax
Working capital
Loan repayment
($100,000)
$100,000

Net Cash Flow (constant $)
$0
$0
PW (18%) =
$163,425
48
(d) The present value loss due to inflation:

(d) Income Statement (no inflation)
0
Income Statement
Revenue
Expenses:
O&M
Depreciation
Interest
$80,000
$80,000
$80,000
$80,000
$80,000
$80,000
$20,000
$32,000
$19,200
$11,520
$11,520
$5,760
Taxable Income
Income Taxes
$60,000
$24,000
$48,000
$19,200
$60,800
$24,320
$68,480
$27,392
$68,480
$27,392
$74,240
$29,696
Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Gains Tax
Working capital
Loan repayment
$36,000
$28,800
$36,480
$41,088
$41,088
$44,544
$36,000
$20,000
$28,800
$32,000
$36,480
$19,200
$41,088
$11,520
$41,088
$11,520
$44,544
$5,760
$30,000
($12,000)
$56,000
$60,800
$55,680
$52,608
$52,608
$68,304
($100,000)
($100,000)
PW (11.32%) =
$140,656
Present value loss=$136,553-$140,656=($4,103)
Present value loss = $136,553 - $140,656 = ($4,103)

(e) Required additional before-tax annual revenue in actual dollars (equal amount) to make-up the inflation loss.
$4,103( A / P,18%, 6)
= $1,955
1 0.40
49
9.45)
(a) & (b) The project cash flows and IRR with no inflation:
Income Statement
Revenue
Expenses:
O&M
Labor
Material
Energy
Depreciation :
Building
Milling machine
Jigs & dies
1
2
$80,000 $80,000
3
$80,000
4
$80,000
5
$80,000
6
$80,000
7
$80,000
8
$80,000
9
$80,000
10
$80,000
$3,000
$3,000
$15,000 $15,000
$9,000
$9,000
$4,500
$4,500
$3,000
$15,000
$9,000
$4,500
$3,000
$15,000
$9,000
$4,500
$3,000
$15,000
$9,000
$4,500
$3,000
$15,000
$9,000
$4,500
$3,000
$15,000
$9,000
$4,500
$3,000
$15,000
$9,000
$4,500
$3,000
$15,000
$9,000
$4,500
$3,000
$15,000
$9,000
$4,500
$15,719 $26,939
$3,333
$4,445
$19,239
$1,481
$13,739
$741
$9,823
$0
$9,812
$3,333
$9,823
$4,445
$4,906
$1,481
$0
$741
$0
$0
Taxable Income
Income Taxes
$29,448 $17,116
$10,307
$5,991
$27,780
$9,723
$34,020
$11,907
$38,677
$13,537
$35,355
$12,374
$34,232
$11,981
$42,113
$14,740
$47,759
$16,716
$48,500
$16,975
Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Building
Milling machine
Jigs & dies
Building
Milling machine
Jigs & dies
(Replacement)
Gains Taxes:
Building
Milling machine
Jigs & dies
$19,141 $11,125
$18,057
$22,113
$25,140
$22,981
$22,251
$27,373
$31,043
$31,525
$19,141 $11,125
$18,057
$22,113
$25,140
$22,981
$22,251
$27,373
$31,043
$31,525
$15,719 $26,939
$3,333
$4,445
$19,239
$1,481
$13,739
$741
$9,823
$0
$9,812
$3,333
$9,823
$4,445
$4,906
$1,481
$0
$741
$0
$0
Net Cash Flow
($110,000)
($10,000)
$10,000
$300
($10,000)
$300
($3,500)
($105)
($105)
($120,000)
$38,193 $42,509
PW (11.32%) = $90,992
$38,777
IRR (%) =
$36,593
$25,158
$36,126
$36,519
$33,760
$31,784
$38,220
28.40%
50
(c) & (d)

(c) and (d) Income Statement (with inflation)
0
Revenue
Expenses:
O&M
Labor
Material
Energy
Depreciation :
Building
Milling machine
Jigs & dies
1
$85,600
2
$91,592
3
$98,003
4
$104,864
5
$112,204
6
$120,058
7
$128,463
8
$137,455
9
$147,077
10
$157,372
$3,090
$15,750
$9,360
$4,635
$3,183
$16,538
$9,734
$4,774
$3,278
$17,364
$10,124
$4,917
$3,377
$18,233
$10,529
$5,065
$3,478
$19,144
$10,950
$5,217
$3,582
$20,101
$11,388
$5,373
$3,690
$21,107
$11,843
$5,534
$3,800
$22,162
$12,317
$5,700
$3,914
$23,270
$12,810
$5,871
$4,032
$24,433
$13,322
$6,048
$15,719
$3,333
$26,939
$4,445
$19,239
$1,481
$13,739
$741
$9,823
$0
$9,812
$3,333
$9,823
$4,445
$4,906
$1,481
$0
$741
$0
$0
Taxable Income
Income Taxes
$33,713
$11,800
$25,979
$9,093
$41,599
$14,560
$53,181
$18,613
$63,592
$22,257
$66,468
$23,264
$72,021
$25,207
$87,088
$30,481
$100,470
$35,165
$109,537
$38,338
Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Building
Milling machine
Jigs & dies
Building
Milling machine
Jigs & dies
(Replacement)
Gains Taxes:
Building
Milling machine
Jigs & dies
$21,913
$16,887
$27,040
$34,568
$41,335
$43,204
$46,814
$56,607
$65,306
$71,199
$21,913
$16,887
$27,040
$34,568
$41,335
$43,204
$46,814
$56,607
$65,306
$71,199
$15,719
$3,333
$26,939
$4,445
$19,239
$1,481
$13,739
$741
$9,823
$0
$9,812
$3,333
$9,823
$4,445
$4,906
$1,481
$0
$741
$0
$0

$10,000
($110,000)
($10,000)
$300
($10,000)
$300
($3,500)
($105)
($105)
($120,000)
($120,000)
$40,965
$38,647
PW (11.32%) = $108,411
$48,271
$42,960
$47,760
$40,100
IRR' (%) =
$49,048
$38,850
$41,353
$30,899
$56,349
$39,724
$61,082
$40,620
$62,994
$39,523
$66,047
$39,093
$77,894
$43,496
30.53%
51
(e). The economic gain in present worth due to inflation = $108,411- $90,992 =
$17,419.
9.46)
After-tax cost of debt:
a) (0.12)(1 0.25) = 0.09 or (9%)
b) (0.14)(1 0.34) = 0.924 or (9.24%)
c) (0.15)(1 0.40) = 0.09 or (9%)
9.47)
0.07 + 1.7(0.14 0.07) = 18.9%
9.48)
ie = 0.25
id = (0.12)(1 0.40) = 0.072
k = (0.072)(0.40) + (0.25)(0.60)
= 0.1788
9.49)
ie = rf + (rM rf )
ie _ AT &T = 0.0435 + 1.2(0.115 0.0435) = 0.1293
ie _ MS = 0.0435 + 1.0(0.115 0.0435) = 0.115
ie _ Walmart = 0.0435 + 0.75(0.115 0.0435) = 0.09713
9.50)
0.2 = 0.05 + (0.15 0.05)

= 1.5
52
9.51)
(a) The net after-tax cash flows for each financing option:
Option 1: Equity Financing (Retained earnings)

Input
Tax Rate(%) =
MARR(%) =
0
39
18
Output
PW(i) =
IRR(%) =
$161,321
42.46%
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
$22,000
$48,980
$22,000
$34,980
$22,000
$24,980
$22,000
$17,860
$22,000
$8,930
Taxable Income
Income Taxes
$123,420
$48,134
$103,020
$40,178
$117,020
$45,638
$127,020
$49,538
$134,140
$52,315
$143,070
$55,797
$75,286
$62,842
$71,382
$77,482
$81,825
$87,273
$75,286
$28,580
$62,842
$48,980
$71,382
$34,980
$77,482
$24,980
$81,825
$17,860
$87,273
$8,930
Income Statement
Net Income
Cash Flow Statement
Net Income
Depreciation
Investment
Salvage
Gains Tax
Working capital
Borrowed funds
Principal repayment
Net Cash Flow
($200,000)
$30,000
$2,219
$25,000
($25,000)
($225,000)
$103,866
$111,822
$106,362
$102,462
$99,685
$153,422
53
Option 2: Debt Financing at 12%

MARR(%) =
18
IRR(%) =
263.36%
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
8,930
5,212
Taxable Income
Income Taxes (39%)
$99,420
38,774
$81,977
31,971
$99,290
38,723
$113,000
44,070
$124,274
48,467
$137,858
53,765
Net Income
$60,646
$50,006
$60,567
$68,930
$75,807
$84,093
75,807
17,860
$ 84,093
$ 8,930
Cash Flow Statement

Net Income
Depreciation
Investment
Salvage
Gains Tax
Working capital
Borrowed funds
Principal repayment
Net Cash Flow
$
$
$
60,646
28,580
$
$
50,006
48,980
$
$
60,567
34,980
$
$
68,930
24,980
$
$
(200,000)
$ 30,000
$ 2,219
$ 25,000
(25,000)
200,000
(24,645)
(25,000) $
PW(18%)=
64,581
(27,603)
$
71,383
(30,915)
$
64,632
(34,625)
$
59,285
(38,780)
$
54,887
(43,433)
$ 106,809
214,469
54
Option 3: Lease Financing

Input
Tax Rate(%) =
MARR(%) =
0
Output
PW(i) = $170,092
IRR(%) =
101.06%
39
18
1
$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
22,000
Income Statement
Revenues (savings)
Expenses:
Lease Payment
O&M costs
Debt interest
$55,000
Taxable Income
Income Taxes (39%)
($55,000)
($21,450)
$97,000
37,830
$97,000
37,830
$97,000
37,830
$97,000
37,830
$97,000
37,830
$152,000
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
(25,000)
(58,550) $ 59,170
Cash Flow Statement

Net Income
Depreciation
Investment
Salvage
Gains Tax
Working capital
Borrowed funds
Principal repayment
Net Cash Flow
$ 25,000
$ 59,170
$ 59,170
$ 59,170
$ 59,170
$ 117,720
55
(b) Vermonts PW cost of owning the equipment by borrowing:
PW of total after-tax revenue:

P1 = $174, 000(1 0.39)( P / A,18%, 6)
= $371, 236
PW cost of working capital drain:

P2 = $25, 000 $25, 000( P / F ,18%, 6)
= $15, 739
PW cost of operating expense:
P3 = $22, 000(1 0.39)( P / A,18%, 6)
= $46,938
PW cost of owning by borrowing:

Net cost = $214, 469 + P1 P2 P3
= $94, 090
(c) Vermonts PW cost of leasing the equipment:
PW cost of after-tax leasing

P = $55, 000(1 0.39) + $55, 000(1 0.39)( P / A,18%,5)
= $138, 467
(d) Buy the tipping machine.
56
9.52) (a),(b),(c) & (d): Assumption: The building will be placed in service in January.
-2
-1
Revenues:
Sales unit
Unit price
Sales volume
Expenses:
Fixed costs
Variable costs
Depreciation :
Building
Equipment
Amortization
Taxable Income
Income Taxes (38%)
Net Income
Cash Flow Statement
Operating Avtivities:
Net Income
Depreciation
Amortization
Investment activities
Opportunity cost*
Land
Building
Equipment
Gains Taxes
Land
Building
Equipment
Working capital
($3,040,000)
($2,500,000)

($5,540,000)
($5,540,000)
($3,500,000)
PW (15%,n =-2)
($3,500,000)
($3,333,333)
200,000
200,000
$511
$536
$102,102,525 $107,207,651
200,000
$400
$80,000,000
200,000
$420
$84,000,000
200,000
$441
$88,200,000
200,000
$463
$92,610,000
200,000
$486
$97,240,500
200,000
$563
$112,568,034
$8,500,000
$52,000,000
$8,925,000
$54,600,000
$9,371,250
$57,330,000
$9,839,813
$60,196,500
$10,331,803
$63,206,325
$10,848,393
$66,366,641
$11,390,813
$69,684,973
$11,960,354
$73,169,222
$258,017
$2,715,100
$1,000,000
$15,526,884
$5,900,216
$269,231
$4,653,100
$1,000,000
$14,552,670
$5,530,014
$269,231
$3,323,100
$1,000,000
$16,906,420
$6,424,439
$269,231
$2,373,100
$1,000,000
$18,931,357
$7,193,916
$269,231
$1,696,700
$1,000,000
$20,736,441
$7,879,848
$269,231
$1,694,800
$1,000,000
$21,923,460
$8,330,915
$269,231
$1,696,700
$1,000,000
$23,165,934
$8,803,055
$269,231
$847,400
$1,000,000
$25,321,828
$9,622,295
$9,626,668
$9,022,655
$10,481,980
$11,737,441
$12,856,594
$13,592,545
$14,362,879
$15,699,533
$9,626,668
$2,973,117
$1,000,000
$9,022,655
$4,922,331
$1,000,000
$10,481,980
$3,592,331
$1,000,000
$11,737,441
$2,642,331
$1,000,000
$12,856,594
$1,965,931
$1,000,000
$13,592,545
$1,964,031
$1,000,000
$14,362,879
$1,965,931
$1,000,000
$15,699,533
$1,116,631
$1,000,000
($7,000,000)
($19,000,000)
$4,500,000
$3,000,000
$3,500,000
($9,600,000)
($480,000)
($504,000)
($529,200)
($555,660)
($583,443)
($612,615)
($643,246)
($760,000)
$2,035,801
($1,330,000)
$13,508,164
($35,600,000)
($32,290,249)
$13,119,784
$11,333,363
$14,440,986
$11,880,635
$14,545,111
$11,396,475
$14,824,112
$11,061,980
$15,239,081
$10,830,130
$15,943,961
$10,791,500
$16,685,564
$10,755,663
$42,270,128
$25,950,192
$21,153,974 PW (15%,n = 0)PW(F /P ,15%,2)

PW(A /P ,15%,8)=
AE(15%)=
Unit profit per production=
$27,976,130.45
$6,234,483.18
$31.17
IRR' =
21.47%
Note: If the firm decides not to invest in the project, the firm could write off the R&D expenditure. The amount of write-off will
be (0.38)($8,000,000) = $3,040,000. If the firm decides to undertake this project, then an opportunity cost of $3,040,000 will be
incurred.
57
(e)
-2
-1
Revenues:
Sales unit
Unit price
Sales volume
Expenses:
Fixed costs
Variable costs
Depreciation :
Building
Equipment
Amortization
Taxable Income
Income Taxes
Net Income
Cash Flow Statement
Net Income
Depreciation
Amortization
Opportunity cost*
Land
Building
Equipment
Gains Taxes
Land
Building
Equipment
Working capital
($3,040,000)
($2,500,000)

($5,540,000)
($5,540,000)
132,016
$400
$52,806,477
132,016
$420
$55,446,801
132,016
$441
$58,219,141
132,016
$463
$61,130,098
132,016
$486
$64,186,603
132,016
$511
$67,395,933
132,016
$536
$70,765,729
132,016
$563
$74,304,016
$8,500,000
$34,324,210
$8,925,000
$36,040,420
$9,371,250
$37,842,441
$9,839,813
$39,734,564
$10,331,803
$41,721,292
$10,848,393
$43,807,356
$11,390,813
$45,997,724
$11,960,354
$48,297,610
$269,231
$2,715,100
$1,000,000
$5,997,936
$2,279,216
$269,231
$4,653,100
$1,000,000
$4,559,050
$1,732,439
$269,231
$3,323,100
$1,000,000
$6,413,119
$2,436,985
$269,231
$2,373,100
$1,000,000
$7,913,391
$3,007,089
$269,231
$1,696,700
$1,000,000
$9,167,577
$3,483,679
$269,231
$1,694,800
$1,000,000
$9,776,153
$3,714,938
$269,231
$1,696,700
$1,000,000
$10,411,262
$3,956,280
$269,231
$847,400
$1,000,000
$11,929,421
$4,533,180
$3,718,721
$2,826,611
$3,976,134
$4,906,303
$5,683,898
$6,061,215
$6,454,982
$7,396,241
$3,718,721
$2,984,331
$1,000,000
$2,826,611
$4,922,331
$1,000,000
$3,976,134
$3,592,331
$1,000,000
$4,906,303
$2,642,331
$1,000,000
$5,683,898
$1,965,931
$1,000,000
$6,061,215
$1,964,031
$1,000,000
$6,454,982
$1,965,931
$1,000,000
$7,396,241
$1,116,631
$1,000,000
($7,000,000)
($19,000,000)
$4,500,000
$3,000,000
$3,500,000
($6,336,777)
($316,839)
($332,681)
($349,315)
($366,781)
($385,120)
($404,376)
($424,594)
($760,000)
$2,031,539
($1,330,000)
$8,916,482
($3,500,000) ($32,336,777)
($3,333,333) ($29,330,410)
$7,386,212
$6,380,488
$8,416,261
$6,924,078
$8,219,149
$6,439,919
$8,181,852
$6,105,424
$8,264,709
$5,873,574
$8,620,870
$5,834,944
$8,996,318
$5,799,107
$29,370,893
$18,031,180
($3,500,000)
PW (15%,n =-2) =
$0 PW (15%,n =0) =PW(F /P ,15%,2)
$0.00
58
(f)
Income Statement
2006
-2
2007
-1
2008
0
Revenues:
Sales unit
Unit price
Sales volume
Expenses:
Fixed costs
Variable costs
Depreciation :
Building
Equipment
Amortization
Taxable Income
Income Taxes
Net Income
Cash Flow Statement
Net Income
Depreciation
Amortization
Opportunity cost*
Land
Building
Equipment
Gains Taxes
Land
Building
Equipment
Working capital
($3,040,000)
($2,500,000)

($5,540,000)
($5,540,000)
2010
2
2011
3
2012
2013
2014
6
2015
7
2016
8
200,000
$400
$80,000,000
200,000
$388
$77,600,000
200,000
$376
$75,272,000
200,000
$365
$73,013,840
200,000
$354
$70,823,425
200,000
$343
$68,698,722
200,000
$333
$66,637,760
200,000
$323
$64,638,628
$8,500,000
$52,000,000
$8,925,000
$50,440,000
$9,371,250
$48,926,800
$9,839,813
$47,458,996
$10,331,803
$46,035,226
$10,848,393
$44,654,169
$11,390,813
$43,314,544
$11,960,354
$42,015,108
$269,231
$2,715,100
$1,000,000
$15,515,670
$5,895,954
$269,231
$4,653,100
$1,000,000
$12,312,670
$4,678,814
$269,231
$3,323,100
$1,000,000
$12,381,620
$4,705,015
$269,231
$2,373,100
$1,000,000
$12,072,701
$4,587,626
$269,231
$1,696,700
$1,000,000
$11,490,465
$4,366,377
$269,231
$1,694,800
$1,000,000
$10,232,129
$3,888,209
$269,231
$1,696,700
$1,000,000
$8,966,473
$3,407,260
$269,231
$847,400
$1,000,000
$8,546,536
$3,247,684
$9,619,715
$7,633,855
$7,676,604
$7,485,075
$7,124,088
$6,343,920
$5,559,213
$5,298,852
$9,619,715
$2,984,331
$1,000,000
$7,633,855
$4,922,331
$1,000,000
$7,676,604
$3,592,331
$1,000,000
$7,485,075
$2,642,331
$1,000,000
$7,124,088
$1,965,931
$1,000,000
$6,343,920
$1,964,031
$1,000,000
$5,559,213
$1,965,931
$1,000,000
$5,298,852
$1,116,631
$1,000,000
($7,000,000)
($19,000,000)
$4,500,000
$3,000,000
$3,500,000
($9,600,000)
$288,000
$279,360
$270,979
$262,850
$254,964
$247,315
$239,896
($760,000)
$2,031,539
($1,330,000)
$7,756,635
($3,500,000) ($35,600,000)
($3,333,333) ($32,290,249)
$13,892,046
$12,000,471
$13,835,546
$11,382,538
$12,539,914
$9,825,351
$11,390,255
$8,499,584
$10,344,983
$7,351,986
$9,555,266
$6,467,380
$8,765,040
$5,650,023
$26,113,657
$16,031,520
($3,500,000)
PW (15%,n =-2) =
2009
1
$8,660,609 PW (15%) =
AE(15%) =
PW(F /P ,15%,2)
PW(A /P ,15%,8)
$11,453,656
$2,552,448
IRR' =
15.48%
59
9.53) (a) The net cash flow from the cogeneration project with bond financing:
(a) The net cash flow from the cogeneration project with bond financing:
0
1
2
Income Statement
Revenue
Electricity bill
$6,120,000
$6,120,000
Excess power
$480,000
$480,000
Expenses:
O&M
$500,000
$500,000
Misc.
$1,000,000
$1,000,000
Standby power
$6,400
$6,400
Fuel
$1,280,000
$1,280,000
Other
Overhaul
Standby power(overhaul)
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
$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
$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
$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
$1,000,000
$6,400
$1,280,000
$1,500,000
$1,500,000
$1,500,000
$1,500,000
$100,000
$100,000
$100,000
$100,000
Depreciation
Unit
$500,000
$950,000
$855,000
$770,000
$693,000
$623,000
Inter Equipment
$100,000
$160,000
$96,000
$57,600
$57,600
$28,800
$945,000
$945,000
$945,000
$945,000
$945,000
$2,268,600
$1,758,600
$317,600
$2,041,000
$816,696
$633,096
$114,336
$734,760
$1,451,904
$1,125,504
$203,264
$1,451,904
$1,125,504
Interest (9%)
Taxable Income
Income Taxes
Net Income
$590,000
$590,000
$591,000
$590,000
$591,000
$295,000
$945,000
$945,000
$945,000
$945,000
$945,000
$945,000
$945,000
$2,118,000
$616,800
$2,278,600
$2,278,600
$677,600
$2,278,600
$2,277,600
$973,600
$762,480
$222,048
$820,296
$820,296
$243,936
$820,296
$819,936
$350,496
$1,306,240
$1,355,520
$394,752
$1,458,304
$1,458,304
$433,664
$1,458,304
$1,457,664
$623,104
$203,264
$1,306,240
$1,355,520
$394,752
$1,458,304
$1,458,304
$433,664
$1,458,304
$1,457,664
$623,104
Cash Flow Statement

Cash from operation
Net Income
Depreciation
Unit
$500,000
$950,000
$855,000
$770,000
$693,000
$623,000
$590,000
$590,000
$591,000
$590,000
$591,000
$295,000
Inter Equipment
$100,000
$160,000
$96,000
$57,600
$57,600
$28,800
$0
$0
$0
$0
$0
$0
Unit
Inter Equipment
($10,000,000)
$1,000,000
($500,000)
Gains Tax
Loan repayment
$490,320
$10,500,000
$0
PW (27%) =
($10,500,000)
$2,051,904
$2,235,504
$1,154,264
$2,133,840
$2,106,120
$1,046,552
$2,048,304
$2,048,304
$1,024,664
$2,048,304
$2,048,664
($8,091,576)
$5,954,443
60
(b). The maximum annual lease amount that ACC is willing to pay is $907,673.
(b) The maximum annual lease amount that ACC is willing to pay is $907,664:
0
1
2
3
Income Statement
Revenue
Electricity bill
$6,120,000
$6,120,000
$6,120,000
Excess power
$480,000
$480,000
$480,000
Expenses:
O&M
$500,000
$500,000
$500,000
Misc.
$1,000,000
$1,000,000
$1,000,000
Standby power
$6,400
$6,400
$6,400
Overhead
$1,280,000
$1,280,000
$1,280,000
Lease
$907,673
$907,673
$907,673
7 - 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
$500,000
$1,000,000
$6,400
$1,280,000
$907,673
$500,000
$1,000,000
$6,400
$1,280,000
$907,673
$500,000
$1,000,000
$6,400
$1,280,000
$907,673
$500,000
$1,000,000
$6,400
$1,280,000
$907,673
$500,000
$1,000,000
$6,400
$1,280,000
$907,673
Taxable Income
Income Taxes
$2,905,927
$1,046,134
$2,905,927
$1,046,134
$2,905,927
$1,046,134
$2,905,927
$1,046,134
$2,905,927
$1,046,134
$2,905,927
$1,046,134
$2,905,927
$1,046,134
$2,905,927
$1,046,134
Net Income
Cash Flow Statement
Cash from operation
Net Income
$1,859,793
$1,859,793
$1,859,793
$1,859,793
$1,859,793
$1,859,793
$1,859,793
$1,859,793
$1,859,793
$1,859,793
$1,859,793
$1,859,793
$1,859,793
$1,859,793
$1,859,793
$1,859,793
$0
$1,859,793
$1,859,793
$1,859,793
$1,859,793
$1,859,793
$1,859,793
$1,859,793
$1,859,793
PW (27%) =
$6,496,872
61

Fundamentos de Ingenieria Economica, 2da Edicion 09

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Fundamentos de Ingenieria Economica, 2da Edicion 09

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Chapter 9 Project Cash Flow Analysis

wages paid to temporary workers: Variable cost

b) Break-even price = $4.80 - $1.78 = $3.02 per unit

marginal tax rate without the project = 34%

b) Average tax rates:

Depreciation Taxable income Combined income Marginal rate

b) Average tax rates

Combined income taxes

Average tax rate

Taxable income with project

Incremental taxable income

Taxable income without project

Taxable income from the project during year 1:

Taxable income without project

Taxable income with project

Incremental taxable income

Incremental tax calculations:

b) Additional income tax calculation:

Taxable income with project

Incremental taxable income

Taxable income without project

$299,551 >0, acceptable

9.11) Investment in industrial robot:

Cash Flow Statement

Accept the investment

X = $60, 000( P / A,15%,10)

9.13) Investment in a new trench excavator:

9.14) Tucson Solar Company:

Cash Flow Statement

AE(12%) = ( $62, 469 ) ( A / P /12%, 6)

Investment in energy management system: N = 9 years

Cash Flow Statement

9.16) Investment decision based on after-tax IRR:

Cash Flow Statement

9.17) Investment in Mazda automatic screw machine:

Cash Flow Statement

Since PW(15%) > 0, accept the investment.

Net Cash Flow (actual)

9.19) Investment decision based on after-tax IRR:

Cash Flow Statement

9.20) (a), (b), and (c)

Cash Flow Statement

9.21) Investment in 3-D computerized car-styling system

Cash Flow Statement

b) Equal repayment of the interest:

c) Equal annual installment:

Cash Flow Statement

Net Cash Flow (actual)

9.25) Income statement approach: (a), (b), and (c)

9.26) (a) and (b)

Cash Flow Statement

(c) This is a service project. The equivalent annual cost is

(a) and (b)

Net Cash Flow

9.28) (a) with no borrowed funds:

(b) With borrowed funds:

9.29) Net cash flow

Net Cash Flow

Accept the investment.

Net Cash Flow

Option 1: Lease (a lease paid at the start of each period)

PW(12%)lease = $144, 000(1 0.40) (1 + ( P / A,12%, 29) )

Note 1: It is assumed that the property is placed in service during