8/9/2019 FIN 301 B Porter Rachna Ch 12 Soln.

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Ch 12-1 Tuesday, April 17, 2007 Soln.

1. Truman industries is considering an expansion. The necessary equipment ould !e purchased "or #$ million, and it ould also an additional #% million in&estment inor'ing capital. The tax rate is (0 percent.

a. hat is the initial in&estment outlay) !. The company spent and expensed #*0,000 on research related to the pro+ect last year.ould this change your ans er) xplain.c. The company plans to use a !uilding it o ns !ut is not no using to house the pro+ect.The !uilding could !e sold "or # 1 million a"ter taxes and real estate commissions. ocould that a""ect your ans er)

a. Equipment $ 9,000,000NOWC Investment 3,000,000Initial investment outlay $12,000,000b. No, last year’s $50,000 e pen!iture is "onsi!ere! a sun# "ost an!

!oes not representan in"remental "as %o&' (en"e, it s oul! not )e in"lu!e! in t eanalysis'c. * e potential sale o+ t e )uil!in represents an opportunity "ost o+"on!u"tin t e pro-e"t in t at )uil!in ' * ere+ore, t e possi)le a+ter.tasale pri"e must )e " ar e! a ainst t e pro-e"t as a "ost'

2' Eisen o&er "ommuni"ations is tryin to estimate t e /rst.year netoperatin "as %o& at year 1 +or a propose! pro-e"t' * e /nan"ialsta as "olle"te! t e +ollo&in in+ormation on t e pro-e"t4ales revenue $10 million

Operatin "osts e "lu!in !epre"iation $ million6epre"iation $ 2 millionInterest e pense $ 2 million

* e "ompany as a 70 per"ent ta rate, an! its W8CC is 10 per"enta' W at is t e pro-e"t’s operatin "as %o& +or t e /rst year)' I+ t is pro-e"t &oul! "anni)ali:e ot er pro-e"ts )y $1 million o+

"as %o& )e+ore ta es per year' (o& &oul! t is " an e yourans&er to part a

"' I nore part )' i+ t e *; !roppe! to 30<, o& &oul! t at " an eyour ans&er to part a

8/9/2019 FIN 301 B Porter Rachna Ch 12 Soln.

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a')' b. * e "anni)ali:ation o+ e istin sales nee!s to )e "onsi!ere! int is analysis on ana+ter.ta )asis, )e"ause t e "anni)ali:e! sales represent sales revenuet e /rm &oul!reali:e &it out t e ne& pro-e"t )ut &oul! lose i+ t e ne& pro-e"t isa""epte!' * us,t e a+ter.ta e e"t &oul! )e to re!u"e t e /rm’s operatin "as %o&)y $1,000,000 1= * > $1,000,000 0'? > $?00,000' * us, t e /rm’s OC@ &oul! no& )e$2,000,000rat er t an $2,?00,000'"'

3' (uan In!ustries is "onsi!erin a propose! pro-e"t & ose estimate!NAB is $12 million' * is estimate assumes t at e"onomi" "on!itions&ill )e avera e’, o&ever t e C@O reali:es t at "on!itions "oul! )e)etter or &orse, so s e per+orme! a s"enario analysis an! o)taine!t ese results

E"onomi" s"enario Aro)' O+ out"ome NAB

;e"ession 0'05 $ 0 milDelo& avera e 0'20 $25mil8vera e 0'50 $12 mil8)ove avera e 0'20 $20 milDoom 0'05 $30 milCal"ulate t e pro-e"t’s e pe"te! NAB, 4t!' !eviation, an! CB

8/9/2019 FIN 301 B Porter Rachna Ch 12 Soln.

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(. /ennedy air ser&ices is no in the "inal year o" a pro+ect. The equipment originallycost #20 million, o" hich 0 has !een depreciated. /ennedy can sell the usedequipment today "or #* mil and its T is (0 . hat is the equipment3s a"ter-tax netsal&age &alue)