Chapter 9 Project Cash Flow Analysis

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Chapter 9 Project Cash Flow Analysis

9.1: (c)

Given: accounting and cash flow data Find: income tax rate to use in project year 1

Approach: find the taxable incomes and income taxes with and without project Revenue $100,000

Expenses 40,000 Depreciation 6,000 Taxable income $ 54,000

Before Project After Project Due to Project Taxable income

Income taxes

$320,000 108,050

$374,000 127,160

$54,000 19,110

Tax rate 33.77% 34% 35.39%

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9.2: (a)

Given: accounting and financial data Find: project cash flow at the end of year 10

Approach: use a tabular approach. Note that there will be no depreciation in year 10, as the asset will be fully depreciated in year 8.

Year 10

Income Statement Revenue

Expenses:

O&M cost Depreciation Taxable income Income taxes (40%) Net income

$150,000

$50,000 0

$100,000

$40,000

$60,000 Cash Flow Statement

Cash flow from operation:

Net income Depreciation

Cash flow from investing:

Investment Salvage value Gains taxes Net cash flow

$60,000 0

$15,000 (6,000)

$69,000

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9.3: (d)

Given: accounting and financial data, with debt financing Find: project cash flow at the end of year 10

Approach: use a tabular approach. Note that there will be no depreciation in year 10, as the asset will be fully depreciated in year 8. There will be entries related to financing activities.

Year 10

Income Statement Revenue

Expenses:

O&M cost Depreciation Debt interest Taxable income Income taxes (40%) Net income

$150,000

$50,000 0 1,480

$98,520

$39,408

$59,112 Cash Flow Statement

Cash flow from operation:

Net income Depreciation

Cash flow from investing:

Investment Salvage value Gains taxes

Cash flow from financing:

Principal repayment Net cash flow

$59,112 0

$15,000 (6,000) ($14.795)

$53,317

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10.4 : (a)

Given: I = $150,000, S = 20,000, O&M = $52,500 per year, N = 7 years, MARR = 12%, tax rate = 40%

Find: net present worth

Approach: Create a cash flow statement using Excel

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0 1 2 3 4 5 6 7 Income Statement

Revenues (savings) $52,500 $52,500 $52,500 $52,500 $52,500 $52,500 $52,500

Expenses:

Depreciation $21,435 $36,735 $26,235 $18,735 $13,395 $13,380 $6,900

Taxable Income $31,065 $15,765 $26,265 $33,765 $39,105 $39,120 $45,600

Income Taxes(40%) $12,426 $6,306 $10,506 $13,506 $15,642 $15,648 $18,240

Net Income $18,639 $9,459 $15,759 $20,259 $23,463 $23,472 $27,360

Cash Flow Statement Operating Activities:

Net Income $18,639 $9,459 $15,759 $20,259 $23,463 $23,472 $27,360

Depreciation $21,435 $36,735 $26,235 $18,735 $13,395 $13,380 $6,900

Investment Activities:

Investment ($150,000)

Salvage $20,000

Gains Tax $2,726

Net Cash Flow ($150,000) $40,074 $46,194 $41,994 $38,994 $36,858 $36,852 $56,986

NPW(12%) $42,640

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9.5: (b)

Given: I = $120,000, S = 0, O&M = $20,000 per year, N = 4 years, MARR = 14%

Find: required annual savings (X)

Approach: Set up a present worth equation as a function of X.

(14%) $120, 000 ( 20, 000)( / ,14%, 4)

$120, 000 2.9137 $58, 274 0 2.9137 $178, 274

$61, 284

PW X P A

X X

X

= − + −

= − + − =

=

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9.6: (c)

Given: financial data, MARR = 15%, t

m

= 40%

Find: net present value of the project

Approach: Obtain the after tax cash flow series using the income statement

approach

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0 1 2 3 4 5

Income Statement Revenue

Expenses:

O&M Depreciation Taxable income Income taxes (40%) Net income

$200

80 30 120 48

$72

$200

80 30 120 48

$72

$200

80 30 120 48

$72

$200

80 30 120 48

$72

$200

80 30 120 48

$72 Cash Flow Statement

Cash flow from operation:

Net income Depreciation

Cash flow from investing:

Investment Salvage value Gains taxes

($150)

$72 30

25 (10)

Net cash flow -$150 $102 $102 $102 $102 $117

(15%) $150 $102( / ,15%, 5) $15( / ,15%, 5) $199.46

PW = − + P A + P F =

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9.7: (a)

Given: statements under inflationary environment Find: the incorrect statement

The correct answer is (a). Under the inflationary economy, lenders will normally charge a higher interest rate to protect them from loss in purchasing power.

9.8: (c)

Given: I = $20,000, S = $5,000, O&M = $4,000 per year, annual revenue =

$15,000, N = 6 years, MARR = 12%, and tax rate = 40%

Find: Rate of return

Approach: Create a cash flow statement using Excel

(5)

Creating a Cash Flow Statement for Machine A

Input Output

Tax Rate(%) 40 PW(i) $14,560

MARR(%) 12 IRR(%) 35%

Project Life(yrs) 6 Borrowed Interest(%) 0

0 1 2 3 4 5 6

Income Statement

Revenue $15,000 $15,000 $15,000 $15,000 $15,000 $15,000

Expenses:

Labor 4,000 4,000 4,000 4,000 4,000 4,000

Material $ - $ - $ - $ - $ - $ -

Overhead $ - $ - $ - $ - $ - $ -

Depreciation-Personal Property 4,000 6,400 3,840 2,304 2,304 1,152

Depreciation-Real Property $ - $ - $ - $ - $ - $ -

Debt Interest $ - $ - $ - $ - $ - $ -

Taxable Income $7,000 $4,600 $7,160 $8,696 $8,696 $9,848

Income Taxes 2,800 1,840 2,864 3,478 3,478 3,939

Net Income $4,200 $2,760 $4,296 $5,218 $5,218 $5,909

Cash Flow Statement

Operating Activities:

Net Income 4,200 2,760 4,296 5,218 5,218 5,909

Depreciation 4,000 6,400 3,840 2,304 2,304 1,152

Personal Property (20,000) 5,000

Real Property $ - $ -

Gains Tax (2,000)

Working Capital $ - $ -

Financing Activities:

Borrowed Funds $ -

Principal Repayment $ - $ - $ - $ - $ - $ -

Net Cash Flow ($20,000) $8,200 $9,160 $8,136 $7,522 $7,522 $10,061

9.9: (c)

Given: I = $12,000, S = 3,000, O&M = $2,500 per year, annual revenue =

$12,500, N = 6 years, MARR = 12%, tax rate = 40%

Find: net present worth

Approach: Create a cash flow statement using Excel. Assume that an identical

asset like machine B will be available at the end of 3 years for replacement.

(6)

Creating a Cash Flow Statement for Machine B

Input Output

Tax Rate(%) 40 PW(i) $11,124

MARR(%) 12 IRR(%) 40%

Project Life(yrs) 6 Borrowed Interest(%) 0

0 1 2 3 4 5 6

Income Statement

Revenue $12,500 $12,500 $12,500 $12,500 $12,500 $12,500

Expenses:

Labor 2,500 2,500 2,500 2,500 2,500 2,500

Material $ - $ - $ - $ - $ - $ -

Overhead $ - $ - $ - $ - $ - $ -

Depreciation-Personal Property 2,400 3,840 1,152 2,400 3,840 1,152

Depreciation-Real Property $ - $ - $ - $ - $ - $ -

Debt Interest $ - $ - $ - $ - $ - $ -

Taxable Income $7,600 $6,160 $8,848 $7,600 $6,160 $8,848

Income Taxes 3,040 2,464 3,539 3,040 2,464 3,539

Net Income $4,560 $3,696 $5,309 $4,560 $3,696 $5,309

Cash Flow Statement

Operating Activities:

Net Income 4,560 3,696 5,309 4,560 3,696 5,309

Depreciation 2,400 3,840 1,152 2,400 3,840 1,152

Personal Property (12,000) -9000 3,000

Real Property $ - $ -

Gains Tax -643 (643)

Working Capital $ - $ -

Financing Activities:

Borrowed Funds $ -

Principal Repayment $ - $ - $ - $ - $ - $ -

Net Cash Flow ($12,000) $6,960 $7,536 ($3,182) $6,960 $7,536 $8,818

9.10: (a)

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