12--1

a.
Cost of the equipment 9,000,000
Operating working capital 3,000,000

Outlay 12,000,000

b.
market research is sunk hence not accounted

c.
The sale proceeds is an opportnity cost and hence to be charged as a cost against the project

12--2
a.
Tax 40%
Sales revenue 10,000,000
Less;Cost 7,000,000
Less Depreciation 2,000,000

Operating profit 1,000,000

Less: tax at 40% 400,000
EBIT (1-T) 600,000
Add :depreciation 2,600,000

b.
the after-tax effect would
reduce the project’s cash
flow by $1,000,000(1 – T) =
$1,000,000(0.6) = $600,000.
Thus, the project’s cash flow
would now be $2,000,000
rather than $2,600,000
lara:
The cannibalization of
existing sales needs to be
considered in this analysis
on an after-tax basis,
because the cannibalized
sales represent sales
revenue the firm would
realize without the new
project but would lose if
the new project is
accepted

C. The project cash flow will improve by $1,00,000 if the tax rate drops to 30%

12--3

Original cost of machine 20,000,000

Less : Depreciation (80%) 16,000,000

BookValue 4,000,000

Sale value 5,000,000

Gain 1,000,000
Since The company sold for 5 million while the book value is 4 million, it has made a gain so pay tax at 40%
Tax on gain 400,000

Here the company gets 50,00,000 by selling but has to pay 4,00,000 as tax thus the cash flow net of tax is 4600000

Net procceds 4,600,000

of tax is 4600000
12--8

a.

Cost of machine 108,000

Add; modification 12,500
Capex 120,500
Add: Working capital 5,500

Initial cost 126,000

Depreciation
Year1 33% 39,765
year2 45% 54,225
year 3 15% 18,075
year 4 7% 8,435
c.

Year 1 2 3

Savings in cost (it is an inflow) 44,000 44,000 44,000 Note:

Depreciation 39,765 54,225 18,075
Capex
EBIT 4,235 -10,225 25,925 Less:Dep
Less: Tax 35% 1,482 -3,579 9,074 Book value

EBIT(1-T) 2,753 -6,646 16,851 Sale value

Add: Dep 39,765 54,225 18,075 Gain
Tax on gain
Salvage value 65,000
Less: tax on salvage lara:
-19,798
See notes to understand
Add: Working capital recovery the tax on the capital
5,500
gain. Negative sign as it is
a cash outflow
Total cash Inflow 42,518 47,579 85,629
Cash outflow(Initital cost) -126,000

Hurdle rate 12%

NPV 10,840

Accept the project

Depreciation provided till end of 3rd year is 93%

120,500
112,065
8,435

65000
56,565
19,798