Description
Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, limited period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.
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 Expenses Depreciation Taxable income $100,000 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: Depreciation Taxable Income Income Taxes(40%) Net Income Cash Flow Statement Operating Activities: Net Income Depreciation Investment Activities: Investment Salvage Gains Tax Net Cash Flow NPW(12%)
1 $52,500 $21,435 $31,065 $12,426 $18,639
2 $52,500 $36,735 $15,765 $6,306 $9,459
3 $52,500 $26,235 $26,265 $10,506 $15,759
4 $52,500 $18,735 $33,765 $13,506 $20,259
5 $52,500 $13,395 $39,105 $15,642 $23,463
6 $52,500 $13,380 $39,120 $15,648 $23,472
7 $52,500 $6,900 $45,600 $18,240 $27,360
$18,639 $21,435 ($150,000)
$9,459 $36,735
$15,759 $26,235
$20,259 $18,735
$23,463 $13,395
$23,472 $13,380
$27,360 $6,900
$20,000 $2,726 ($150,000) $42,640 $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
1
$200 80 30 120 48 $72
2
$200 80 30 120 48 $72
3
$200 80 30 120 48 $72
4
$200 80 30 120 48 $72
5
$200 80 30 120 48 $72
$72 30 ($150)
$72 30
$72 30
$72 30
$72 30
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 Tax Rate(%) MARR(%) Project Life(yrs) Borrowed Interest(%) 0 40 12 6 0 1 2 3 4 5 6 Output PW(i) IRR(%) $14,560 35%
Income Statement Revenue Expenses: Labor Material Overhead Depreciation-Personal Property Depreciation-Real Property Debt Interest Taxable Income Income Taxes Net Income 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
$15,000 4,000 $ $ 4,000 $ $ $7,000 2,800 $4,200 $15,000 4,000 $ $ 6,400 $ $ $4,600 1,840 $2,760 $15,000 4,000 $ $ 3,840 $ $ $7,160 2,864 $4,296 $15,000 4,000 $ $ 2,304 $ $ $8,696 3,478 $5,218 $15,000 4,000 $ $ 2,304 $ $ $8,696 3,478 $5,218 $15,000 4,000 $ $ 1,152 $ $ $9,848 3,939 $5,909
4,200 4,000 (20,000) $ $ $ $ ($20,000) $8,200
2,760 6,400
4,296 3,840
5,218 2,304
5,218 2,304
5,909 1,152 5,000 $ (2,000) $ -
$ $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 Tax Rate(%) MARR(%) Project Life(yrs) Borrowed Interest(%) 0 40 12 6 0 1 2 3 4 5 6 Output PW(i) IRR(%) $11,124 40%
Income Statement Revenue Expenses: Labor Material Overhead Depreciation-Personal Property Depreciation-Real Property Debt Interest Taxable Income Income Taxes Net Income 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
$12,500 2,500 $ $ 2,400 $ $ $7,600 3,040 $4,560 $12,500 2,500 $ $ 3,840 $ $ $6,160 2,464 $3,696 $12,500 2,500 $ $ 1,152 $ $ $8,848 3,539 $5,309 $12,500 2,500 $ $ 2,400 $ $ $7,600 3,040 $4,560 $12,500 2,500 $ $ 3,840 $ $ $6,160 2,464 $3,696 $12,500 2,500 $ $ 1,152 $ $ $8,848 3,539 $5,309
4,560 2,400 (12,000) $ -
3,696 3,840
5,309 1,152
4,560 2,400
3,696 3,840
5,309 1,152 3,000 $ (643) $ -
-9000 -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.
doc_893112340.pdf
Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, limited period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.
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 Expenses Depreciation Taxable income $100,000 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: Depreciation Taxable Income Income Taxes(40%) Net Income Cash Flow Statement Operating Activities: Net Income Depreciation Investment Activities: Investment Salvage Gains Tax Net Cash Flow NPW(12%)
1 $52,500 $21,435 $31,065 $12,426 $18,639
2 $52,500 $36,735 $15,765 $6,306 $9,459
3 $52,500 $26,235 $26,265 $10,506 $15,759
4 $52,500 $18,735 $33,765 $13,506 $20,259
5 $52,500 $13,395 $39,105 $15,642 $23,463
6 $52,500 $13,380 $39,120 $15,648 $23,472
7 $52,500 $6,900 $45,600 $18,240 $27,360
$18,639 $21,435 ($150,000)
$9,459 $36,735
$15,759 $26,235
$20,259 $18,735
$23,463 $13,395
$23,472 $13,380
$27,360 $6,900
$20,000 $2,726 ($150,000) $42,640 $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
1
$200 80 30 120 48 $72
2
$200 80 30 120 48 $72
3
$200 80 30 120 48 $72
4
$200 80 30 120 48 $72
5
$200 80 30 120 48 $72
$72 30 ($150)
$72 30
$72 30
$72 30
$72 30
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 Tax Rate(%) MARR(%) Project Life(yrs) Borrowed Interest(%) 0 40 12 6 0 1 2 3 4 5 6 Output PW(i) IRR(%) $14,560 35%
Income Statement Revenue Expenses: Labor Material Overhead Depreciation-Personal Property Depreciation-Real Property Debt Interest Taxable Income Income Taxes Net Income 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
$15,000 4,000 $ $ 4,000 $ $ $7,000 2,800 $4,200 $15,000 4,000 $ $ 6,400 $ $ $4,600 1,840 $2,760 $15,000 4,000 $ $ 3,840 $ $ $7,160 2,864 $4,296 $15,000 4,000 $ $ 2,304 $ $ $8,696 3,478 $5,218 $15,000 4,000 $ $ 2,304 $ $ $8,696 3,478 $5,218 $15,000 4,000 $ $ 1,152 $ $ $9,848 3,939 $5,909
4,200 4,000 (20,000) $ $ $ $ ($20,000) $8,200
2,760 6,400
4,296 3,840
5,218 2,304
5,218 2,304
5,909 1,152 5,000 $ (2,000) $ -
$ $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 Tax Rate(%) MARR(%) Project Life(yrs) Borrowed Interest(%) 0 40 12 6 0 1 2 3 4 5 6 Output PW(i) IRR(%) $11,124 40%
Income Statement Revenue Expenses: Labor Material Overhead Depreciation-Personal Property Depreciation-Real Property Debt Interest Taxable Income Income Taxes Net Income 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
$12,500 2,500 $ $ 2,400 $ $ $7,600 3,040 $4,560 $12,500 2,500 $ $ 3,840 $ $ $6,160 2,464 $3,696 $12,500 2,500 $ $ 1,152 $ $ $8,848 3,539 $5,309 $12,500 2,500 $ $ 2,400 $ $ $7,600 3,040 $4,560 $12,500 2,500 $ $ 3,840 $ $ $6,160 2,464 $3,696 $12,500 2,500 $ $ 1,152 $ $ $8,848 3,539 $5,309
4,560 2,400 (12,000) $ -
3,696 3,840
5,309 1,152
4,560 2,400
3,696 3,840
5,309 1,152 3,000 $ (643) $ -
-9000 -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.
doc_893112340.pdf