财务管理课后答案 托马斯 chapter 12

1、 Chapter 12 Discussion Questions 12-1. What are the important administrative considerations in the capital budgeting process? Important administrative considerations relate to: the search for and discovery of investment opportunities, the collection of data, the evaluation of projects, and the reeva

2、luation of prior decisions. 12-2. Why does capital budgeting rely on analysis of cash flows rather than on net income? Cash flow rather than net income is used in capital budgeting analysis because the primary concern is with the amount of actual dollars generated. For example, depreciation is subtr

3、acted out in arriving at net income, but this non-cash deduction should be added back in to determine cash flow or actual dollars generated. 12-3. What are the weaknesses of the payback method? The weaknesses of the payback method are: There is no consideration of inflows after payback is reached. a

4、. The concept fails to consider the time value of money. b. 12-4. What is normally used as the discount rate in the net present value method? The cost of capital as determined in Chapter 11. 12-5. mutually exclusive investments mean? What does the term The selection of one investment precludes the s

5、election of other alternative investments because the investments compete with one another. For example if a company is going to build one new plant and is considering 5 cities, one city will win and the others will lose. 12-6. How does the modified internal rate of return include concepts from both

6、 the traditional internal rate of return and the net present value methods? The modified internal rate of return calls for the determination of the interest rate that equates future inflows to the investment as does the traditional internal rate or return. However, it incorporates the reinvestment r

7、ate assumption of the net present value method. That is that inflows are reinvested at the cost of capital. S12-1 12-7. If a corporation has projects that will earn more than the cost of capital, should it ration capital? From a purely economic viewpoint, a firm should not ration capital. The firm s

8、hould be able to find additional funds and increase its overall profitability and wealth through accepting investments to the point where marginal return equals marginal cost. What is the net present value profile? What three points should be determined 12-8. to graph the profile? The net present va

9、lue profile allows for the graphic portrayal of the net present value of a project at different discount rates. Net present values are shown along the vertical axis and discount rates are shown along the horizontal axis. The points that must be determined to graph the profile are: a. The net present

10、 value at zero discount rate. b. The net present value as determined by a normal discount rate. c. The internal rate of return for the investment. How does an assets ADR (asset depreciation range) relate to its MACRS 12-9. category? The ADR represents the asset depreciation range or the expected phy

11、sical life of the asset. Generally, the midpoint of the range or life is utilized. The longer the ADR midpoint, the longer the MACRS category in which the asset is placed. However, most assets can still be written off more rapidly than the midpoint of the ADR. For example, assets with ADR midpoints

12、of 10 years to 15 years can be placed in the 7-year MACRS category for depreciation purposes. S12-2 Chapter 12 Problems 1. Assume a corporation has earnings before depreciation and taxes of $90,000, depreciation of $40,000, and that it is in a 30 percent tax bracket. Compute its cash flow using the

13、format below. Earnings before depreciation and taxes _ _ Depreciation _ Earnings before taxes _ Taxes 30% _ Earnings after taxes _ Depreciation _ Cash flow 12-1. Solution: Earnings before depreciation and taxes $90,000 40,000 Depreciation 50,000 Earnings before taxes 15,000 Taxes 30% $35,000 Earning

14、s after taxes +40,000 Depreciation $75,000 Cash flow S12-3 2. a. In problem 1, how much would cash flow be if there were only $10,000 in depreciation? All other factors are the same. How much cash flowb. is lost due to the reduced depreciation between problems 1 and 2a? 12-2. Solution: a. Earnings b

15、efore depreciation and taxes $90,000 10,000 Depreciation $80,000 Earnings before taxes 24,000 Taxes 30% $56,000 Earnings after taxes +10,000 Depreciation $66,000 Cash flow $75,000 Cash flow (problem 1) b. 66,000 Cash flow (problem 2a) $ 9,000 Difference in cash flow Assume a firm has earnings before

16、 depreciation and taxes of $200,000 and no depreciation. 3. It is in a 40 percent tax bracket. a . Compute its cash flow. b. Assume it has $200,000 in depreciation. Recompute its cash flow. c. How large a cash flow benefit did the depreciation provide? 12-3. Solution: a. Earnings before depreciation

17、 and taxes $200,000 0 Depreciation 200,000 Earnings before taxes 80,000 Taxes 40% 120,000 Earnings after taxes Depreciation 0 $120,000 Cash flow S12-4 12-3. (Continued) b. Earnings before depreciation and taxes $200,000 200,000 Depreciation 0 Earnings before taxes 0 Taxes 40% 0 Earnings after taxes

18、200,000 Depreciation $200,000 Cash flow c. The $200,000 in depreciation provided a cash flow benefit of $80,000. Cash flow (b) $200,000 Cash flow (a) 120,000 Cash flow benefit $ 80,000 4. Bob Cole, the president of a New York Stock Exchange-listed firm, is very short term oriented and interested in

19、the immediate consequences of his decisions. Assume a project that will provide an increase of $3 million in cash flow because of favorable tax consequences, but carries a three-cent decline in earning per share because of a write-off against first quarter earnings. What decision might Mr. Cole make

20、? 12-4. Solution: Bob Cole Being short term oriented, he may make the mistake of turning down the project even though it will increase cash flow because of his fear of investors negative reaction to the more widely reported quarterly decline in earnings per share. Even though this decline will be te

21、mporary, investors might interpret it as a negative signal. S12-5 5. Assume a $100,000 investment and the following cash flows for two alternatives. Year Investment A Investment B $40,000 1 $30,000 30,000 50,000 2 15,000 20,000 3 15,000 60,000 4 50,000 5 Which of the two alternatives would you selec

22、t under the payback method? 12-5. Solution: Payback for Investment X Payback for Investment Y 1 year $100,000$30,000 40,000 1 Year $100,0002 years 70,00050,000 60,00030,000 2 years 3 years 30,00020,000 20,000 15,000 3 years 15,000 15,000 4 years Payback Investment X = 3 years Payback Investment Y =

23、4 years Investment X should be selected because of the faster payback. S12-6 6. Assume a $40,000 investment and the following cash flows for two alternatives. Investment YInvestment X Year $ 6,000 $15,000 1 8,000 2 20,000 9,000 10,000 3 17,000 4 20,000 5 Which of the alternatives would you select un

24、der the payback method? 12-6. Solution: Payback for Investment X Payback for Investment Y $40,0001 year $40,000$ 6,000 $15,000 1 year 2 years 2 years 8,000 34,000 20,000 25,000.5 years 26,000 9,000 5,000/10,000 3 years 4 years 17,00017,000 Payback Investment X = 4.00 years Payback Investment Y = 2.5

25、0 years Investment Y would be selected because of the faster payback. 7. Referring back to problem 6, if the inflow in the fifth year for Investment X were $20,000,000 instead of $20,000, would your answer change under the payback method? 12-7. Solution: The $20,000,000 inflow would still leave the

26、payback period for Investment X at 4 years. It would remain inferior to Investment Y under the payback method. S12-7 8. The Short-Line Railroad is considering a $100,000 investment in either of two companies. The cash flows are as follows: . Electric Co Water WorksYear 1. $70,000 $15,000 2. 15,000 1

27、5,000 3. 15,000 70,000 4-10 . 10,000 10,000 Using the payback method, what will the decision be? a . Explain why the answer in part a can be misleading. . b Solution: 12-8. Short-Line Railroad a. Payback for Electric Co. Payback for Water Works $100,000 $70,000 1 year $100,000$15,000 1 year 30,000 1

28、5,000 2 years 85,00015,000 2 years 15,000 15,000 3 years 70,00070,000 3 years Payback (Electric Co.) = 3 years Payback (Water Works) = 3 years b. The answer in part a is misleading because the two investments seem to be equal with the same payback period of three year. Nevertheless, the Electric Co.

29、 is a superior investment because it recovers large cash flows in the first year, while the large recovery for Water Works is not until the third year. The problem is that the payback method does not consider the time value of money. S12-8 9. X-treme Vitamin Company is considering two investments, b

30、oth of which cost $10,000. The cash flows are as follows: Project BYear Project A$12,000 . $10,000 1 .8,000 2 . 6,000 .6,000 3 . 16,000 a. Which of the two projects should be chosen based on the payback method? b. Which of the two projects should be chosen based on the net present value method? Assu

31、me a cost of capital of 10 percent. Should a firm normally have more confidence in answer a. or answer b? cSolution: 12-9. X-treme Vitamin Company a. Payback Method Payback for Project A 10,000 .83 years? 12,000Payback for Project B 10,000 1 year? 10,000Under the Payback Method, you should select Pr

32、oject A because of the shorter payback period. S12-9 12-9. (Continued) b. Net Present Value Method Project A PV at 10%Cash Flow Present Value Year IF$10,908 .909 $12,000 1 $ 6,608 .826 2 $ 8,000 $ 4,506 .751 3 $ 6,000 Present Value of Inflows $22,022 Present Value of Outflows 10,000 Net Present Valu

33、e $12,022 Project B PV at 10% Present ValueCash Flow Year IF.909 $ 9,090 $10,000 1 .826 $ 4,956 $ 6,000 2 .751 3 $16,000 $12,016 Present Value of Inflows $26,062 Present Value of Outflows 10,000 Net Present Value $16,062 Under the net present value method, you should select Project B because of the

34、higher net present value. c. A company should normally have more confidence in answer b because the net present value considers all inflows as well as the time value of money. The heavy late inflow for Project B was partially ignored under the payback method. S12-10 10. You buy a new piece of equipm

35、ent for $16,980, and you receive a cash inflow of $3,000 per year for 12 years. What is the internal rate of return? 12-10. Solution: Appendix D $16,980 5.660?PV? IFA$3,000IRR = 14% For n = 12, we find 5.660 under the 14% column. 11. Warner Business Products is considering the purchase of a new mach

36、ine at a cost of $11,070. The machine will provide $2,000 per year in cash flow for eight years. Warners cost of capital is 13 percent. Using the internal rate of return method, evaluate this project and indicate whether it should be undertaken. 12-11. Solution: Warner Business Products Appendix D P

37、V = $11,070/$2,000 = 5.535 IFAIRR = 9% For n = 8, we find 5.353 under the 9% column. The machine should not be purchased since its return is under 13 percent. S12-11 12. Elgin Restaurant Supplies is analyzing the purchase of manufacturing equipment that will cost $20,000. The annual cash inflows for

38、 the next three years will be: Cash FlowYear1. $10,000 2. 9,000 3. 6,500 Determine the internal rate of return using interpolation. a. With a cost of capital of 12 percent, should the machine be purchased? . b Solution: 12-12. Elgin Restaurant Supplies a. Step 1 Average the inflows. $10,0009,000 6,5

39、00 $25,500?3?$8,500 Step 2 Divide the inflows by the assumed annuity in Step 1. Investment$20,000?2.353? 8,500Annuityst approximation. Go to Appendix D for the 1Step 3 The value in Step 2 (for n = 3) falls between 13% and 14%. S12-12 12-12. (Continued) Step 4 Try a first approximation of discounting

40、 back the inflows. Because the inflows are biased toward the early years, we will use the higher rate of 14%. Year Cash Flow PV at 14% Present Value IF1 $10,000 .877 $ 8,770 2 9,000 .769 6,921 3 6,500 .675 4,388 $20,079 Step 5 Since the NPV is slightly over $20,000, we need to try a higher rate. We

41、will try 15%. Year Cash Flow PV at 15% Present Value IF1 $10,000 .870 $ 8,700 2 9,000 .756 6,804 3 6,500 .658 4,277 $19,781 Because the NPV is now below $20,000, we know the IRR is between 14% and 15%. We will interpolate. $20,079 . PV 14% $20,079. PV 14% 19,781 . PV 15% 20,000. Cost $ 298 $ 79 14%

42、+ ($79/$298) (1%) = 14% + .265 (1%) = 14.265% IRR The IRR is 14.265% S12-13 12-12. (Continued) If the student skipped from 14% to 16%, the calculations to find the IRR would be as follows: Year Cash Flow PV at 16% Present Value IF1 $10,000 .862 $ 8,620 2 9,000 .743 6,687 3 6,500 .641 4,167 $19,474 $

43、20,079 . PV 14% $20,079. PV 14% 19,474 . PV 16% 20,000. Cost $ 605 $ 79 14% + ($79/$605) (2%) =14% + (.131) (2%) = 14.262% This answer is very close to the previous answer, the difference is due to rounding. b. Since the IRR of 14.265% (or 14.262%) is greater than the cost of capital of 12%, the pro

44、ject should be accepted. S12-14 13. Aerospace Dynamics will invest $110,000 in a project that will produce the following cash flows. The cost of capital is 11 percent. Should the project be undertaken? (Note that the fourth years cash flow is negative.) Cash FlowYear1. $36,000 2. 44,000 3. 38,000 4.

45、 (44,000) 5. 81,000 Solution: 12-13. Aerospace Dynamics Year Cash Flow PVPresent Value at 11% IF.901 $36,000 1 $ 32,436 2 44,000 .812 35,728 3 38,000 .731 27,778 4 (44,000) .659 (28,996) 5 81,000 .593 48,033 Present value of inflows $114,979 Present value of outflows 110,000 Net present value $ 4,97

46、9 The net present value is positive and the project should be undertaken S12-15 14. The Horizon Company will invest $60,000 in a temporary project that will generate the following cash inflows for the next three years. Cash FlowYear $15,000 1. 25,000 2. 40,000 3. The firm will also be required to sp

47、end $10,000 to close down the project at the end of the three years. If the cost of capital is 10 percent, should the investment be undertaken? 12-14. Solution: Horizon Company Present Value of Inflows Year Cash Flow PV at 10% Present Value IF$15,000 1 .909 $13,635 25,000 2 .826 20,650 40,000 3 .751

48、 30,040 $64,325 Present Value of Outflows $60,000 0 $60,000 1.000 7,510 10,000 .751 3 $67,510 Present Value of inflows $64,325 Present Value of outflows 67,510 Net present value ($ 3,185) The net present value is negative and the project should not be undertaken. Note, the $10,000 outflow could have

49、 been subtracted out of the $40,000 inflow in the third year and the same answer would result. S12-16 15. Skyline Corp. will invest $130,000 in a project that will not begin to produce returns until after the 3rd year. From the end of the 3rd year until the end of the 12th year (10 periods), the ann

50、ual cash flow will be $34,000. If the cost of capital is 12 percent, should this project be undertaken? 12-15. Solution: Skyline Corporation Present Value of Inflows Find the Present Value of a Deferred Annuity A = $34,000, n = 10, i = 12% PV = A PV (Appendix D) IFAAPV = $34,000 5.650 = $192,100 A D

51、iscount from beginning of the third period (end of second period to present): FV = $192,100, n = 2, i = 12% = FV PVPV (Appendix B) IF = $192,100 .797 = $153,104 PV $153,104 Present value of inflows Present value of outflows 130,000 Net present value $ 23,104 The net present value is positive and the

52、 project should be undertaken. S12-17 16. The Ogden Corporation makes an investment of $25,000, which yields the following cash flows: Cash FlowYear $ 5,000 1. 5,000 2. 8,000 3. 9,000 4. 5. 10,000 What is the present value with a 9 percent discount rate (cost of capital)? . aWhat is the internal rat

53、e of return? Use the interpolation procedure shown in this . b chapter. In this problem would you make the same decision in parts ac. and b 12-16. Solution: Ogden Corporation a. Year Cash Flow PV 9% = Present Value IF$ 5,000 .917 $ 4,585 1 5,000 .842 2 4,210 8,000 .772 3 6,176 9,000 .708 6,372 4 10,

54、000 .650 5 6,500 Present value of inflows $27,843 Present value of outflows 25,000 Net present value $ 2,843 b. Since we have a positive net present value, the internal rate of return must be larger than 9%. Because of uneven cash flows, we need to use trial and error. Counting the net present value

55、 calculation as the first trial, we now try 11% for our second trial. S12-18 12-16. (Continued) Year Cash Flow PV 11% = Present Value IF$ 5,000 .901 1 $ 4,505 5,000 2 .812 4,060 8,000 3 .731 5,848 9,000 .659 5,931 4 10,000 .593 5 5,930 Present value of inflows $26,274 A two percent increase in the d

56、iscount rate has eliminated over one-half of the net present value so another two percent should be close to the answer. Year Cash Flow PV 13% = Present Value IF$ 5,000 .885 $ 4,425 1 5,000 .783 2 3,915 8,000 3 .693 5,544 9,000 .613 4 5,517 10,000 .543 5,430 5 Present value of inflows $24,831 $26,27

57、4 . PV 11% $26,274. PV 11% 24,831 . PV 13% 25,000. Cost $ 1,443 $ 1,274 $1,274 12.77%?11%?1.77%(2%)?11%(2%)11%.883 $1,443Approximately the same answer can be derived by interpolating between 12% and 13% instead of 11% and 13%. c. Yes, both the NPV is greater than 0 and the IRR is greater than the co

58、st of capital. S12-19 17. The Danforth Tire Company is considering the purchase of a new machine that would increase the speed of manufacturing and save money. The net cost of this machine is $66,000. The annual cash flows have the following projections. Cash FlowYear $21,000 . 1 29,000 2 . 36,000 .

59、 3 16,000 4 . . 5 8,000 If the cost of capital is 10 percent, what is the net present value? a. What is the internal rate of return? b . Should the project be accepted? Why? . c 12-17. Solution: The Danforth Tire Company a. Net Present Value Year Cash Flow 10% PV Present Value IF$19,089 1 .909 $21,0

60、00 23,954 29,000 2 .826 27,036 3 .751 36,000 10,928 16,000 4 .683 4,968 5 8,000 .621 $85,975 Present value of inflows Present value of outflows 66,000 $19,975 Net present value S12-20 12-17. (Continued) b. Internal Rate of Return We will average the inflows to arrive at an assumed annuity. $ 21,000