ing Economics Fall 2017 ll Initials: Examination 3 22-23. A project for T ngs an

Question

ing Economics Fall 2017 ll Initials: Examination 3 22-23. A project for T ngs and is being terminated. The market value of the b The compan The sportation of raw materials did not yield estimated project had the following cash flows in actual doilan.ected to maina interest rate i ' = 15% for this product, and inflation is at a 3% is 409/. ws in actual dollars. The company uses a real average. The company uses MACRS depreciation to terminate th pute the net presa Estimate the after tax cash actual dollar cas RS depreciation and has a combined tax rate is 40%. ollar cash flows to real dollars, and compute the net present olars. Cash flows are in actual dollar x $1,000. After Tax Actual S O&M; Taxable Year Init Cost Savings Costs 0 ($20,000) Depr. Income Taxes Cash Flow Reals $18,000 ($10,000) $18,000 ($10,000) $18,000 ($10,000) 2 3 Book Value Depr Recapture/Loss

Explanation / Answer

RECOVERY PERIOD OF BARGE=10 Years (MACRS, GDS) A B=A*20000 Year Depreciation Rate Amount of depreciation 1 10% $                 2,000 2 18% $                 3,600 3 14.40% $                 2,880 TOTAL $                 8,480 Book value=(20000-8480) $              11,520 Salvavage value $              14,000 Depreciation recapture $                 2,480 (14000-11520) Taxes $                    992 (2480*0.4) After taxTerminal cash flow $              13,008 (14000-992) Present value of cash flow=(Cash flow)/((1+i)^N) i=Interest rate=15%=0.15 N=Year of cash flow N A B C D E=B+C+D F=E*0.4 G=E-F-D H I=G+H Year Initial cost Savings O& M cost Depreciation Taxable Income Taxes After tax cash flow After taxTerminal Cash Flow Net after tax cash flow 0 ($20,000) $0 $0 $0 $0 $0 ($20,000) $0 ($20,000) 1 $18,000 ($10,000) ($2,000) $6,000 $2,400 $5,600 $0 $5,600 2 $18,000 ($10,000) ($3,600) $4,400 $1,760 $6,240 $0 $6,240 3 $18,000 ($10,000) ($2,880) $5,120 $2,048 $5,952 $ 13,008 $18,960 N A B=A/(1.03^N) C=B/(1.15^N) Year Actual dollar cash flow Real Dollar cash flow Present Value in Real dollars 0 ($20,000) -20000 -20000 1 $5,600 5436.893204 4727.733221 2 $6,240 5881.798473 4447.484668 3 $18,960 17351.08586 11408.6206 TOTAL 583.8384926 NET PRESENT WORTH IN REAL DOLLARS $      583,838.49

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