Principles of Corporate Finance, Concise, 2nd Edition

Spreadsheet Templates
MAIN MENU -- Chapter 6

Instructions Question 17 Question 24

Question 11 Question 19 Question 26

Question 14 Question 20 Question 27

Question 15 Question 21 Question 28

Question 16 Question 22 Question 29

Question 33

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 Principles of Corporate Finance, Concise Main Menu

Second Edition

Instructions

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see a separate tab for each problem, along with the Main Menu, Instructions and
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Help Top
There are two sources of help throughout these spreadsheet templates. First, you will find comments
in specific cells (highlighted in red) providing tips to what formula or function is needed to complete
the problem. Second, you will find links to Microsoft Office's online help page when an Excel Function
is needed to complete the problem.

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Chapter 6
Question 11

Student Name:
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Figures in $
Initial Investment
Sales in Year 1
Costs in Year 1
Inflation
Working Capital (% of sales-following yr)
Life of the Project
Taxes
Nominal discount rate
Real Discount rate
Salvage Value of Plant & Equipment

Years
0 1 2 3 4 5
Capital Investment
Sales
Costs
Operating Income
Depreciation
Net Profit before Taxes
Taxes
Net Profit after Taxes
Depreciation added back
Cash flows
Working Capital
Net Cash Flows

Discounted value of Nominal Cash Flows

Cash Flows adjusted for Inflation
Discounted value of Real Cash Flows

Present Value (Nominal Cash Flows)

Present Value (Real Cash Flows)

Cost of Plant & Equipment

NPV (Nominal Cash Flows)

NPV (Real Cash Flows)
Difference between Nominal
and Real Cash flows

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Chapter 6
Question 14

Student Name:
Course Name:
Student ID:
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Select the green colored cells below for tips and suggestions to complete this problem.

Assumptions
Installation cost $50,000
Tax rate 35%
Opportunity cost 5%

MACRS percentages Annual Tax

Years Percentages Depreciation Shield
1 20%
2 32%
3 19.2%
4 11.52%
5 11.52%
6 5.76%

Value of tax shield if:

Installations costs expensed year 1

Value of tax shield if:

Capitalized and depreciated

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Chapter 6
Question 15

Student Name:
Course Name:
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Year 0 1 2 3 4 5
Sales (millions of traps) 0 0.50 0.60 1.00 1.00 0.60

Initial Investment
Life of Project in Years
Salvage value of Plant and Equipment
Working Capital as % of forcast sales
Production costs
Sale Price
Taxes
Cost of Capital

Years
0 1 2 3 4 5
(Figures in 000's)
Capital Investment
Accumulated Depreciation
Year-End Book Value
Working capital
Total Book Value

Unit Sales
Revenues
Costs
Depreciation
Pretax Profit (includes salvage in yr 5)
Taxes at 35%
Profit after tax

Revenues
Costs
Tax on operations
Cash Flow from Operations
Change in working capital
Capital Investment
Net Cash Flows
Discount Factor @ 12%
Present Value

NPV

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Chapter 6
Question 16

Student Name:
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Select the green colored cells below for tips and suggestions to complete this problem.

Assumptions
Projected cash flows:
Initial investment ($100,000)
Before-tax cash inflow $26,000
Company B tax rate 35%
Opportunity cost of capital 8%
Year
1 2 3 4 5 6
5-year MACRS Schedule:

Company A: Year
Projected cash flows 1 2 3 4 5 6
Cash in
Tax
Cash flow

Company B: Year
Projected cash flows 1 2 3 4 5 6
Cash in
Depreciation
Taxable income
Tax
Net income
Cash flow

(a) Calculate project NPV for each company.

Company A NPV: Help with Excel's NPV function

Company B NPV:

(b) What is the IRR of the after-tax cash flows for each company? What does the comparison of the
IRRs suggest is the effective corporate tax rate?
Year
1 2 3 4 5 6
Cash flow
IRR for A
Cash flow
IRR for B
Help with Excel's IRR function
Effective tax rate

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Enter the values in blue colored cells
Chapter 6
Question 17

Student Name:
Course Name:
Student ID:
Course Number:

Click here to use Tables 6.5 and 6.6 for the answer part a.

a. How does the guano projects NPV change if IM&C is forced to use the seven-year
MACRS tax depreciation schedule?

Click here to use Tables 6.1 for the answers to parts b and c.
Click here to use Tables 6.2 for the answers to parts b and c.
Click here to use Tables 6.4 for the answers to parts b and c.

b. New engineering estimates raise the possibility that capital investment will be more
than $10 million, perhaps as much as $15 million. On the other hand, you believe
that the 20% cost of capital is unrealistically high and that the true cost of capital is
about 11%. Is the project still attractive under these alternative assumptions?

c. Continue with the assumed $15 million capital investment and the 11% cost of capital.
What if sales, cost of goods sold, and net working capital are each 10% higher
in every year? Recalculate NPV. Note: Enter the revised sales, cost, and workingcapital
forecasts in the spreadsheet for Table 6.1.

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Chapter 6
Question 19

Student Name:
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Select the green colored cells below for tips and suggestions to complete this problem.

a)Read the notes to the table carefully. Which entries make sense? Which do not? Why or why not?

Consider each of the items listed and type your answer in the text box below. Attach any additional sheets if necessary.

Item
Capital Expenditure Capital Expenditure
Research and Development 1. If the spare warehouse space will be used now or in the future, then the project should be credited with these benefits.
2. Charge opportunity cost of the land and building.
Working Capital 3. The salvage value at the end of the project should be included.
Revenues Research and Development
Operating Costs 1. Research and development is a sunk cost.
Working Capital
Overhead 1. Will additional inventories be required as volume increases?
Depreciation 2. Recovery of inventories at the end of the project should be included.
Interest 3. Is additional working capital required due to changes in receivables, payables, etc.?
Revenue
Taxes 1. Revenue forecasts assume prices (and quantities) will be unaffected by competition, a common and critical mistake.
Net Cash Flow Operating Costs
1. Are percentage labor costs unaffected by increase in volume in the early years?
2. Wages generally increase faster than inflation. Does Reliable expect continuing productivity gains to offset this?
Overhead
b) What additional information wouldtruly
1. Is overhead youincremental?
need to construct a version of Table 6.7 that makes sense?
Depreciation
1. Depreciation is not a cash flow, but the ACRS deprecation does affect tax payments.
List the items for which you woulddepreciation
2. ACRS like more information
is fixed inbelow:
nominal terms. The real value of the depreciation tax shield is reduced by inflation.
Interest
1 1. It is bad practice to deduct interest charges (or other payments to security holders). Value the project as if it is all equity-
financed.
2 Tax
3 1. See comments on ACRS depreciation and interest.
4 2. If Reliable has profits on its remaining business, the tax loss should not be carried forward.
Net Cash Flow
5 1. See comments on ACRS depreciation and interest.
6 2. Discount rate should reflect project characteristics; in general, it is not equivalent to the companys borrowing rate.
7
8
9
10

c)Construct such a table and recalculate NPV. Make additional assumptions as necessary.

Assumptions
1 Enter all figures in thousands of dollars (e.g., $100,000 is entered as 100).
2
3
4
5
6
7
8
9
10
11
12

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
1
2
3
4
5
6
7
8
9
10
11
12
13 Net Cash Flows
14 Present value

16 Net present value = Help with Excel's SUM function

Copyright 2011 McGraw-Hill/Irwin

Enter the values in blue colored cells
Chapter 6
Question 20

Student Name:
Course Name:
Student ID:
Course Number:

Annual costs

Transporter acquired
Average no of miles per day
Investment Cost
of the Transporter
Fuel and maintenance
Insurance costs
Value of Transporter
after 8 years (in real
terms)

Transporter rented
Rental (Fixed)
Rental per mile
Rental incl of Tip
Total Rent

Nominal rate
Inflation rate
Real rate

Years
0 1 2 3 4 5 6 7 8
Investment
Savings (in real terms)
Insurance (in real terms)
Fuel (in real terms)
Net Cash Flow
(in real terms)
Discounted at 5.83%
Present Value
NPV

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Chapter 6
Question 21

Student Name:
Course Name:
Student ID:
Course Number:

Select the green colored cells below for tips and suggestions to complete this problem.

Assumptions
Initial investment ($000) Enter all figures in thousands of dollars (e.g., $100,000 is entered as 100).
Resale Value year 8
Working Capital Investment
Projected working capital
(% of Sales)
Yearly rental income
Rental Income growth rate
First year sales
Sales growth rate
Manufacturing costs
(% of Sales)
Tax rate
Cost of capital
Year
0 1 2 3 4 5 6 7 8
Sales
Manufacturing Costs
Depreciation
Earnings before tax
Taxes
Net Income

Working Capital
Increase in W.C.
Lost After Tax Rental Income
Initial Investment
Sale of Plant
Tax on Sale of Plant

Net Cash Flows

Present value

Net present value = Help with Excel's SUM function

Copyright 2011 McGraw-Hill/Irwin

Enter the values in blue colored cells
Chapter 6
Question 22

Student Name:
Course Name:
Student ID:
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RMB
Initial Investment
Salvage Value
(in real terms)
Salvage Value
(in nominal terms)
Life of Plant in yrs
Car production pa
Selling price per car
Increase in price pa

Raw materials
Increase in costs pa

Labor costs
Increase in costs pa

Annual Rent

Nominal Discount rate

Inflation rate
Taxes

Figures in millions
Years
0 1 2 3 4 5
Capital Investment
Accumulated Depreciation
Year-End Book Value

Unit Sales
Price / unit (growing 4%)
Raw Material Cost /
Unit (growing 3%)

Revenues
Raw Material Costs
Labor Costs (growing 7%)
Land costs (prepaid)
Depreciation
Pretax Profit
Taxes at 25%
Profit after tax

Revenues
Cash costs
Tax on operations
Cash Flow from Operations
Capital Investment
Net Cash Flows
Discount Factor @ 12%
Present Value

NPV

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Enter the values in blue colored cells
Chapter 6
Question 24

Student Name:
Course Name:
Student ID:
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Figures in 000'
Newer Machine
Sale Value today
Operating costs pa
Overhaul in Year 5
Operating costs thereafter
Sale Value in Year 10

Old Machine
Sale Value today
Overhaul in Year 0
Operating costs thereafter
Sale Value in Year 5

Taxes
Real cost of capital

Alternative 1
Sell the new machine

Sale value "new machine" net of taxes

Overhaul of old machine
PV of annual operating costs
of Old Machine
Sale value "old machine" net of taxes
PV of above sale value
Net Cash Inflow

Equivalent annual cost

Alternative 2
Sell the old machine

Sale value "old machine" net of taxes

Overhaul of new machine
PV of annual operating costs
of new Machine before overhaul
PV of annual operating costs
of new Machine after overhaul
Sale value "new machine" net of taxes
PV of above sale value
Net Cash Inflow

Equivalent annual cost

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Chapter 6
Question 26

Student Name:
Course Name:
Student ID:
Course Number:

Select the green colored cells below for tips and suggestions to complete this problem.

The net cash flows for each copier have been calculated for you and are shown below.
Select each cell to see the formula used for this calculation.
Parts A through D below have been structured to help you develop the solution.

Assumptions
Current Copier Net Cash Flows:
Net *
Years Cash Flow
1 -675
2 -675
3 -4,575
4 -4,889
5 -5,200
6 -5,200
* After taxes
New Copier Projected Net Cash Flows:
Net *
Years Cash Flow
20000 0 -25,000
1 600
2 1,493
3 880
4 443
5 131
6 131
7 131
8 -261

Cost of capital 7%
Income tax rate 35%

A. What is the present value of each copier?

Present value of current copier

Equivalent annual cost

Present value of new copier

B. If you replace the current copier now, when the book value is $6,248 and
the resale value is $8,000, what will be the present value of the decision?

Present value
Equivalent annual cost

C. If you replace the copier in 2 years, when the book value is $2,678 and what will be the present value of the decision?
the resale value is $3,500, what will be the present value of the decision?

Present value
Equivalent annual cost

D. If you replace the copier in 6 years, what will be the present value of the decision? Assume a zero book and
resale value.

Present value
Equivalent annual cost

When should the copier be replaced?

Help with Excel's PV function

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Chapter 6
Question 27

Student Name:
Course Name:
Student ID:
Course Number:

Enter formulas in the table below to find the PV of the Tax Shield (Figures in millions)
Recovery-Period Years
Class 1 2 3 4 5 6 7 8 9 10 11
10-year 10.00% 18.00% 14.40% 11.52% 9.22% 7.37% 6.55% 6.55% 6.56% 6.55% 3.28%
Depreciation
Tax Shield
PV of Tax Shield

Use Excel's PV function to find the Annuity Factor assuming a 7% discount rate (the PV of $1 for t years) Click here for help with Excel's PV function
Annuity Factor - 25 years

Equivalent Annual Cost of Tax Shield

Equivalent Annual Cost of the Investment

Extra Cost per gallon (after-tax) per gallon

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Chapter 6
Question 28

Student Name:
Course Name:
Student ID:
Course Number:

a.
0 1 2 3 4
Cash flows A 40000 10000 10000 10000
PV Cash flows A
Cash flows B 50000 8000 8000 8000 8000
PV Cash flows B

Annuity Factor - 3 years

Annuity Factor - 4 years

Equivalent Annual Cost - Machine A per year rental

Equivalent Annual Cost - Machine B per year rental

b. Which machine should Borstal buy?

c. How much would you actually have to charge in each future year if there is steady 8% per year inflation?
Machine A Machine B

Click here for help with Excel's PV function

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Chapter 6
Question 29

Student Name:
Course Name:
Student ID:
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0 1 2 3 4
Cash flows A 40000.0
PV Cash flows A
Cash flows B 50000.0
PV Cash flows B

Annuity Factor - 3 years

Annuity Factor - 4 years

Equivalent Annual Cost A

Equivalent Annual Cost B

Click here for help with Excel's PV function

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Chapter 6
Question 33

Student Name:
Course Name:
Student ID:
Course Number:

$ million
Initial Investment
Revenues in first year
Costs in first year

Total Capacity
Electricity price per mwH
Capacity utilization Level 1
Capacity utilization Level 2
Revenue @ 35% capacity
Revenue @ 30% capacity

Inflation
MACRS years
Taxes
Cost of Capital

Years
0 1 2 3 4 5 6
a. Capital cost
Revenues
Maintenance & other costs
MACRS depreciation
Pretax profit
Tax
Cash flow
PV
NPV
MACRS depreciation (%)

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 Enter the values in blue colored cells
Chapter 6
Question 33
Years
7 8 9 10 11 12 13
Revenues
Maintenance & other costs
MACRS depreciation
Pretax profit
Tax
Cash flow
NPV
MACRS depreciation (%)

Years
14 15 16 17 18 19 20 21
Revenues
Maintenance & other costs
MACRS depreciation
Pretax profit
Tax
Cash flow
NPV
MACRS depreciation (%)

b. Using the same spreadsheet above, what would be the NPV at a capacity factor of 30%:

Copyright 2011 McGraw-Hill/Irwin

 TABLE 6.1 IM&C's guano project -- projections ($ thousands) reflecting inflation and straight line depreciation

Period
0 1 2 3 4 5 6 7
1. Capital investment 10,000 -1,949
2. Accumulated depn. 1,583 3,167 4,750 6,333 7,917 9,500 0
3. Year-end book value 10,000 8,417 6,833 5,250 3,667 2,083 500 0
4. Working capital 550 1,289 3,261 4,890 3,583 2,002 0
5. Total book value (3 + 4) 8,967 8,122 8,511 8,557 5,666 2,502 0
6. Sales 523 12,887 32,610 48,901 35,834 19,717
7. Cost of goods sold 837 7,729 19,552 29,345 21,492 11,830
8. Other costs 4,000 2,200 1,210 1,331 1,464 1,611 1,772
9. Depreciation 1,583 1,583 1,583 1,583 1,583 1,583 0
10. Pretax profit -4,000 -4,097 2,365 10,144 16,509 11,148 4,532 1,449
11. Tax -1,400 -1,434 828 3,550 5,778 3,902 1,586 507
12. Profit after tax (10 - 11) -2,600 -2,663 1,537 6,593 10,731 7,246 2,946 942

Notes:
No. of years depreciation 6
Assumed salvage value in depreciation calculation 500
Tax rate (percent) 35

Copyright 2011 McGraw-Hill/Irwin

 TABLE 6.2 IM&C's guano project -- initial cash flow analysis with straight-line depreciation ($ thousands)

Period
0 1 2 3 4 5 6 7

1 Capital investment and disposal -10,000 0 0 0 0 0 0 1,442

2. Change in working capital -550 -739 -1,972 -1,629 1,307 1,581 2,002
3. Sales 0 523 12,887 32,610 48,901 35,834 19,717 0
4. Cost of goods sold 0 837 7,729 19,552 29,345 21,492 11,830 0
5. Other costs 4,000 2,200 1,210 1,331 1,464 1,611 1,772 0
6. Tax -1,400 -1,434 828 3,550 5,778 3,902 1,586
7 Operating cash flow (3 - 4 - 5 - 6) -2,600 -1,080 3,120 8,177 12,314 8,829 4,529
8. Net cash flow (1 + 2 + 3) -12,600 -1,630 2,381 6,205 10,685 10,136 6,110 3,444
9. Present value -12,600 -1,358 1,654 3,591 5,153 4,074 2,046 961

Net present value = 3,520

Cost of capital (percent) 20

Go back to Table 6.1 to change Sales, Cost of goods sold, etc.

Copyright 2011 McGraw-Hill/Irwin

 TABLE 6.4 Tax Depreciation Schedules by Recovery-Period Class

Recovery-Period Years
Class 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
3-year 33.33 44.45 14.81 7.41
5-year 20.00 32.00 19.20 11.52 11.52 5.76
7-year 14.29 24.49 17.49 12.49 8.93 8.92 8.93 4.46
10-year 10.00 18.00 14.40 11.52 9.22 7.37 6.55 6.55 6.56 6.55 3.28
15-year 5.00 9.50 8.55 7.70 6.93 6.23 5.90 5.90 5.91 5.90 5.91 5.90 5.91 5.90 5.91 2.95
20-year 3.75 7.22 6.68 6.18 5.71 5.28 4.89 4.52 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 2.23

Copyright 2011 McGraw-Hill/Irwin

 TABLE 6.5 Tax payments on IM&C's guano project ($ thousands)

No. of years depreciation (3, 5 or 7 years only) 5

Tax rate (percent) 35
Period
0 1 2 3 4 5 6 7
MACRS % 20.0 32.0 19.2 11.5 11.5 5.8 0.0
Tax depreciation (MACRS % x depreciable investment) 2,000 3,200 1,920 1,152 1,152 576 0

1 Sales 0 523 12,887 32,610 48,901 35,834 19,717 0

2 Cost of goods sold 0 837 7,729 19,552 29,345 21,492 11,830 0
3 Other costs 4,000 2,200 1,210 1,331 1,464 1,611 1,772 0
4 Tax depreciation 0 2,000 3,200 1,920 1,152 1,152 576 0
5 Pretax profits -4,000 -4,514 748 9,807 16,940 11,579 5,539 2,002
6 Tax -1,400 -1,580 262 3,432 5,929 4,053 1,939 701

TABLE 6.6 IM&C's guano project -- revised cash flow analysis with MACRS depreciation ($ thousands)

Period
0 1 2 3 4 5 6 7

1 Change in working capital -550 -739 -1,972 -1,629 1,307 1,581 1,949
2. Capital investment & disposal -10,000 0 0 0 0 0 0 2,002
3. Sales 0 523 12,887 32,610 48,901 35,834 19,717 0
4. Cost of goods sold 0 837 7,729 19,552 29,345 21,492 11,830 0
5. Other costs 4,000 2,200 1,210 1,331 1,464 1,611 1,772 0
6. Tax -1,400 -1,580 262 3,432 5,929 4,053 1,939 701
7 Operating cash flow (3 - 4 - 5 - 6) -2,600 -934 3,686 8,295 12,163 8,678 4,176 -701
8. Net cash flow (1 + 2 + 3) -12,600 -1,484 2,947 6,323 10,534 9,985 5,757 3,269
9. Present value -12,600 -1,237 2,047 3,659 5,080 4,013 1,928 912

Net present value = 3,802

Cost of capital (percent) 20

Note: Vary depreciable life by changing inputs in these tables. Go back to Tables 6.1 or 6.2 to change sales, cost of goods sold, cost of capital etc.

Copyright 2011 McGraw-Hill/Irwin