5.Erwin DeLavall, the Plant Manager of Patch Grove Cabinets, is trying to decide whether or not to replace the old manual lathe machine with a new computerized lathe. He thinks the new machine will add value, but is not sure how to quantify his opinion. He asks his colleague, Terri Wharten, for advice. Wharten‘s son just happens to be a Level II CFA candidate. DeLavall and Wharten provide the following information to Wharten’s son: Company Assumptions: §
Tax rate: 40% §
Weighted average cost of capital (WACC): 13% New Machine Assumptions: §
Cost of (includes shipping and installation): $90,000 §
Salvage value at end of year 5: $15,000 §
Depreciation Schedule: MACRS 7-year, with depreciation rates in years 1-5 of 14%, 25%, 17%, 13%, and 9%, respectively §
Purchase will initially increase current assets by $20,000 and will increase current liabilities by $25,000 §
Impact on Operating Cash Flows Years 1- 5 (includes depreciation and taxes): $16,800 (assume equal amount each year for simplicity) Old Machine Assumptions: §
Current Value: $30,000 Book value: $13,000 §
Book value: $13,000 Which of the following choices is most correct? Patch Grove Cabinets should: A) replace the old lathe with the new lathe because the new one will add $3,760 to the firm's value. B) not replace the old lathe with the new lathe because the new one will decrease the firm's value by $5,370. C) replace the old lathe with the new lathe because the new one will add $10,316 to the firm's value. D) not replace the old lathe with the new lathe because the new one will decrease the firm's value by $3,132. The correct answer was A) The valuation method that shows the project’s impact on the value of the firm is net present value (NPV). To calculate NPV, we need to determine the initial investment outlay, the operating cash flows, and the terminal year cash flows. Then, we discount the cash flows at the WACC. The calculations are as follows: Step 1: Initial Investment Outlay: = cost of new machine + proceeds/loss from old machine + change in net working capital (NWC) = -$90,000 + $30,000 - $6,800 + $5,000 = -$61,800
(cash outflow) Details of calculation: · Cost of new lathe = $90,000 outflow · Sale of Old Machine: o Sales price = $30,000 inflow o Tax/tax credit: $6,800 outflow § = (Sales price – book value)*(tax rate) = (30,000 – 13,000)*0.4 · Change in NWC = $5,000 inflow o DNWC = D current assets - D current liabilities = 20,000 – 25,000 = -5,000 (a decrease in working capital is a source of funds) Step 2: Operating Cash Flows (years 1-4): Given as $16,800
inflow Step 3: Terminal Value: = year 5 cash flow + return/use of NWC + proceeds/loss from disposal of new machine + tax/tax credit = $16,800 - $5,000 + $15,000 + $1,920 = $28,720
inflow Details of calculation: · Year 5 cash flow (given) = $16,800 inflow · Working capital (reverse 5,000 initial inflow) = $5,000 outflow · Sale of New Lathe: o Sales price = $15,000 inflow o Tax/tax credit: $1,920 inflow § = (Sales price – book value)*(tax rate) § Here, the Book value = Purchase price – depreciated amount. Using MACRS we have depreciated 78% of the value, or have 22% remaining. 0.22 * 90,000 = 19,800 § Tax effect = (15,000 – 19,800)*(0.4) = -1,920, or a tax credit Step 4: Calculate NPV: NPV = -$61,800 + ($16,800 / 1.131) + ($16,800 / 1.132) +($16,800 / 1.133) +($16,800 / 1.134) +($28,720 / 1.135) = $3,759. Since the NPV is positive, Patch Grove should replace the old lathe with the new one, because the new lathe will increase the firm’s value by the amount of the NPV, or $3,759. You may also solve this problem quickly by using the cash flow (CF) key on your calculator. Calculating NPVA with the HP12C®
| Key Strokes | Explanation | Display
| [f]→[FIN]→[f]→[REG] | Clear Memory Registers | 0.00000 | [f]→[5] | Display 5 decimals – you only need to do this once. | 0.00000 | 61,800→[CHS]→[g]→[CF0] | Initial Cash Outlay | -61,800.00000 | 16,800→[g]→[CFj] | Period 1 Cash flow | 16,800.00000 | 4→[g]→[Nj] | Cash Flow Occurs for 4 periods | 4.00000 | 28,720→[g]→[CFj] | Period 5 Cash flow | 28,720.00000 | 13→ | WACC | 13.00000 | [f]→[NPV] | Calculate NPV | 3,759.18363 |
Calculating NPVA with the TI Business Analyst II Plus→ | Key Strokes | Explanation | Display | [2nd]→[Format]→[5]→[ENTER] | Display 5 decimals – you only need to do this once. | DEC= 5.00000 | [CF]→[2nd]→[CLR WORK] | Clear Memory Registers | CF0 = 0.00000 | 61,800®[+/-]→[ENTER] | Initial Cash Outlay | CF0 = -61,800.00000 | [↓]→16,800→[ENTER] | Period 1 Cash Flow | C01 = 16,800.00000 | [↓] 4 [ENTER] | Frequency of Cash Flow 1 | F01 = 4.00000 | [↓]→28,720→[ENTER] | Period 2 Cash Flow | C02 = 28,720.00000 | [↓] | Frequency of Cash Flow 2 | F02 = 1.00000 | [NPV]→13→[ENTER] | WACC | I = 13.00000 | [↓]→[CPT] | Calculate NPV | NPV = 3,759.18363 |
6.Given the following information, what is the initial cash outflow? Purchase price of the new machine | $8,000 | Shipping and Installation charge | $2,000 | Sale price of old machine | $6,000 | Book value of old machine | $2,000 | Inventory increases if installed | $3,000 | Accounts payable increase if installed | $1,000 | Tax rate on Capital Gains | 25% |
A) -$10,000. B) -$7,000. C) -$3,000. D) +$2,000. The correct answer was B) -$10,000 for purchase price plus shipping and handling costs + 6,000 from cash sale of old machine - 1,000 for capital gains taxes on old machine [(6,000 – 2,000)*.25] - 2,000 cash outflow for change in Net Working Capital (-3,000 Inv+1,000 AP) -$7,000 | 
发表于 2008-4-12 18:46
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