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
Depreciation
Taxable income

40,000
6,000
$ 54,000

Before Project
After Project
Due to Project
Taxable income
$320,000
$374,000
$54,000
108,050
127,160
19,110
Income taxes
Tax rate
33.77%
34%
35.39%
_______________________________________________________________________
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
Cash Flow Statement
Cash flow from operation:
Net income
Depreciation
Cash flow from investing:
Investment
Salvage value
Gains taxes
Net cash flow

$150,000
$50,000
0
$100,000
$40,000
$60,000

$60,000
0

$15,000
(6,000)
$69,000

_______________________________________________________________________

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
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

$150,000
$50,000
0
1,480
$98,520
$39,408
$59,112

$59,112
0

$15,000
(6,000)
($14.795)
$53,317

_______________________________________________________________________
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

0
Income Statement
Revenues (savings)
Expenses:

$52,500

$52,500

$52,500

$52,500

$52,500

$52,500

$52,500

$21,435

$36,735

$26,235

$18,735

$13,395

$13,380

$6,900

Taxable Income
Income Taxes(40%)

$31,065
$12,426

$15,765
$6,306

$26,265
$10,506

$33,765
$13,506

$39,105
$15,642

$39,120
$15,648

$45,600
$18,240

Net Income

$18,639

$9,459

$15,759

$20,259

$23,463

$23,472

$27,360

Depreciation

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Investment
Salvage
Gains Tax

($150,000)

Net Cash Flow

NPW(12%)

($150,000)
$42,640

$18,639

$9,459

$15,759

$20,259

$23,463

$23,472

$27,360

$21,435

$36,735

$26,235

$18,735

$13,395

$13,380

$6,900

$20,000
$2,726
$40,074

$46,194

$41,994

$38,994

$36,858

$36,852

$56,986

_______________________________________________________________________

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.

PW (14%) = $120, 000 + ( X 20, 000)( P / A,14%, 4)

= $120, 000 + 2.9137 X $58, 274 = 0
2.9137 X = $178, 274
X = $61, 284
_______________________________________________________________________
9.6: (c)
Given: financial data, MARR = 15%, tm = 40%
Find: net present value of the project
Approach: Obtain the after tax cash flow series using the income statement
approach

0
Income Statement
Revenue
Expenses:
O&M
Depreciation
Taxable income
Income taxes (40%)
Net income
Cash Flow Statement
Cash flow from operation:
Net income
Depreciation
Cash flow from investing:
Investment
Salvage value
Gains taxes

$200

$200

$200

$200

$200

80
30
120
48
$72

80
30
120
48
$72

80
30
120
48
$72

80
30
120
48
$72

80
30
120
48
$72

$72

$72
30

$72

$72
30

$72
30

30

30

($150)
25
(10)

-$150
$102
$102
$102
$102
$117
Net cash flow
PW (15%) = $150 + $102( P / A,15%,5) + $15( P / F ,15%,5) = $199.46
________________________________________________________________________

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

Creating a Cash Flow Statement for Machine A

Input

Output

Tax Rate(%)

40

PW(i)

$14,560

MARR(%)

12

IRR(%)

35%

Project Life(yrs)

Borrowed Interest(%)

Income Statement
Revenue
Expenses:
Labor
Material
Overhead
Depreciation-Personal Property
Depreciation-Real Property
Debt Interest

$15,000

$15,000

$15,000

$15,000

$15,000

$15,000

4,000

4,000

4,000

4,000

4,000

4,000

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

4,000

6,400

3,840

2,304

2,304

1,152

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

Taxable Income
Income Taxes

$7,000

$4,600

$7,160

$8,696

$8,696

$9,848

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

4,200

2,760

4,296

5,218

5,218

5,909

4,000

6,400

3,840

2,304

2,304

1,152

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Personal Property
Real Property
Gains Tax
Working Capital
Financing Activities:
Borrowed Funds
Principal Repayment
Net Cash Flow

(20,000)

5,000

$ -

$ (2,000)

$ -

$ -

$ -

($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.

Creating a Cash Flow Statement for Machine B

Input

Output

Tax Rate(%)

40

PW(i)

$11,124

MARR(%)

12

IRR(%)

40%

Project Life(yrs)

Borrowed Interest(%)

Income Statement
Revenue
Expenses:
Labor
Material
Overhead
Depreciation-Personal Property
Depreciation-Real Property
Debt Interest

$12,500

$12,500

$12,500

$12,500

$12,500

$12,500

2,500

2,500

2,500

2,500

2,500

2,500

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

2,400

3,840

1,152

2,400

3,840

1,152

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

$ -

Taxable Income
Income Taxes

$7,600

$6,160

$8,848

$7,600

$6,160

$8,848

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

4,560

3,696

5,309

4,560

3,696

5,309

2,400

3,840

1,152

2,400

3,840

1,152

Cash Flow Statement

Operating Activities:
Net Income
Depreciation
Investment Activities:
Personal Property
Real Property
Gains Tax
Working Capital
Financing Activities:
Borrowed Funds
Principal Repayment
Net Cash Flow

(12,000)

-9000

3,000

-643

(643)

$ -

$ -

$ -

$ -

$ -

($12,000)

$ -

$ -

$ -

$ -

$ -

$ -

$6,960

$7,536

($3,182)

$6,960

$7,536

$8,818

9.10: (a)

2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This publication is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage
in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.