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Chapter 5 Questions

Chapter 5 Questions

Sample Answer 

Chapter 5 Questions

Question 1

1  Average Book Value and EBIT for Each Year
  Year Opening Book Value (A) Annual Depreciation [(25 – 10)/5] (B) Closing Book Value (C = A – B) Average Book Value [(A+C)/2] Annual Revenue Cost of Goods Sold Annual Depreciation
  1 25 3 22 23.5 20 10 3
  2 22 3 19 20.5 22 11 3
  3 19 3 16 17.5 24.2 12.1 3
  4 16 3 13 14.5 26.62 13.31 3
  5 13 3 10 11.5 29.28 14.64 3
2  Pre-Tax Rate of Return, By Year and Average
Year EBIT Average Book Value Pre Tax rate of return 9ebit/ Average Book Value)
1 7 23.5 29.79%
2 8 20.5 39.02%
3 9.1 17.5 52%
4 10.31 14.5 71.10%
5 11.64 11.5 101.23%
Average 58.63%
3  EAT
Year EBIT Tax EAT (EBIT – Tax)
1 7 2.8 4.2
2 8 3.2 4.8
3 9.1 3.64 5.46
4 10.31 4.12 6.19
5 11.64 4.66 6.98
4  After-Tax Rate of Return, By Year and Average
Year EAT Average Book Value After-Tax Rate of Return (EAT/Average Book Value*100)
1 4.2 23.5 17.87%
2 4.8 20.5 23.41%
3 5.46 17.5 31.20%
4 6.19 14.5 42.66%
5 6.98 11.5 60.74%
Average 35.18%

Question 12

Year Project A Project B Project C PVIF @12% Project A Project B Project C
A B C D A*D B*D C*D
0 -10,000 5,000 -15,000 1 -10,000.00 5,000.00 -15,000.00
1 8,000 5,000 10,000 1 7,142.86 4,464.29 8,928.57
2 7,000 -8,000 10,000 1 5,580.36 -6,377.55 7,971.94
IRR 32.74% -13.99% 21.53%
Net Present Value 2,723.21 3,086.73 1900.51

Question 16

Question 16
EBIT 3,000,000
Less depreciation 500,000
Profit before Tax 2,500,000
Less Tax 1,000,000
Net Income 1,500,000
Add Depreciation 500,000
Operating cash Inflows 2,000,000
Year Operating Cashflows Investment Total Cashflows PV Present Value
0 0 -20,000,000 -20,000,000 1 -20,000,000
1 2,000,000 0 2,000,000 1 1,777,777.78
2 2,000,000 0 2,000,000 1 1,580,246.91
3 2,000,000 0 2,000,000 1   1,404,663.92
4 2,000,000 0 2,000,000 1 1,248,590.15
5 2,000,000 0 2,000,000 1 1,109,857.91
6 2,000,000 0 2,000,000 0 986,540.37
7 2,000,000 0 2,000,000 0 876,924.77
8 2,000,000 0 2,000,000 0 779,488.69
9 2,000,000 0 2,000,000 0 692,878.83
10 2,000,000 0 2,000,000 0 -923,838.44
11 2,000,000 0 2,000,000 0 547,459.82
12 2,000,000 0 2,000,000 0 486,630.95
13 2,000,000 0 2,000,000 0 432,560.84
14 2,000,000 0 2,000,000 0 384,498.53
15 2,000,000 0 2,000,000 0 341,776.47
16 2,000,000 0 2,000,000 0 303,801.31
17 2,000,000 0 2,000,000 0 270,045.61
18 2,000,000 0 2,000,000 0 240,040.54
19 2,000,000 0 2,000,000 0 213,369.37
20 2,000,000 0 2,000,000 0 284,492.49
21 2,000,000 0 2,000,000 0 168,588.14
22 2,000,000 0 2,000,000 0 149,856.13
23 2,000,000 0 2,000,000 0 133,205.45
24 2,000,000 0 2,000,000 0 118,404.84
25 2,000,000 0 2,000,000 0 105,248.75
26 2,000,000 0 2,000,000 0 93,554.44
27 2,000,000 0 2,000,000 0 83,159.50
28 2,000,000 0 2,000,000 0 73,919.56
29 2,000,000 0 2,000,000 0 65,706.27
30 2,000,000 0 2,000,000 0 496,447.41
Net Present Value -6,043,087.68

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Question 


Week Four – Chapter 5 Questions

Select three formula-driven-problems from the Chapter 5 that you wish to showcase and prepare a Microsoft Excel document showing the Excel formulas used to prepare the solution for those problems.

Chapter 5 Questions

Chapter 5 Questions

REMINDER: Part of the grade that you receive on your problems is the utilization of Formulas. Therefore, do not pick problems that only require a narrative!

Question 1

You have been given the following information on a project:

  • It has a five-year lifetime
  • The initial investment in the project will be $25 million, and the investment will be depreciated straightline, down to a salvage value of $10 million at the endof the fifth year.
  • The revenues are expected to be $20 million nextyear and to grow 10% a year after that for the remaining four years.
  • The cost of goods sold, excluding depreciation, is expected to be 50% of revenues.
  • The tax rate is 40%.
  1. Estimate the pretax return on capital, by year and on average, for the project.
  2. Estimate the after-tax return on capital, by year and on average, for the project.
  3. If the firm faced a cost of capital of 12%, should it take this project?

Question 12

You have a project that does not require an initial investment but has its expenses spread over the life of the project. Can the IRR be estimated for this project? Why or why not?

Question 16

You are analyzing a project with a thirty-year lifetime, with the following characteristics:

  • The project will require an initial investment of $20 million and additional investments of $5 million in year 10 and $5 million in year 20.
  • The project will  generate  earnings  before  interest and  taxes  of  $3  million  each    (The tax  rate  is 40%.)
  • The depreciation will amount to $500,000 each year, and the salvage value of the equipment will be equal to the remaining book value at the end of year 30.
  • The cost of capital is 12.5%.
  1. Estimate the NPV of this project.
  2. Estimate the IRR on  this  project.  What  might  be some of the problems in estimating the IRR for this project?

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