PROBLEM 2-1 Solution Legend

= Value given in problem

Given Solution: = Formula/Calculation/Analysis req
Discount rate 10% = Qualitative analysis or Short answ

Cash Flow Year (s) Present Value

a. $500 5 $ 310
b. $500 5 $ 1,895
c. $500 50 $ 4,957
d. $500 100 $ 5,000
ion Legend
n in problem
alculation/Analysis required
analysis or Short answer required
 PROBLEM 2-2 Solution Legend
= Value given in problem
Given = Formula/Calculation/Analysis required
a. = Qualitative analysis or Short answer required
Initial investment $ 4,000,000.00
Annual Cash Flows 500,000.00
Project Life 10

Solution:
IRR = 4.28%

Given

b. Year Cash Flow

0 $ (4,000,000.00)
1 500,000.00
2 500,000.00
3 500,000.00
4 500,000.00
5 300,000.00
6 500,000.00
7 500,000.00
8 500,000.00
9 500,000.00
10 500,000.00
11 500,000.00
12 500,000.00
13 500,000.00
14 500,000.00

Solution:
IRR = 7.94%
sis required
rt answer required
 Problem 2-3

PROBLEM 2-3

Given Solution Legend

Growth rate in EBIT for years 1-5 5% = Value given in problem
EBIT (year 1) $ 100,000 = Formula/Calculation/Analysis required
CAPEX for year 0 $ 400,000 = Qualitative analysis or Short answer required
Depreciable life of fixed assets 5 years
Tax rate 30%
New working capital for years 1-5 20% of EBIT

Solution
Year
0 1 2 3 4 5
EBIT $ 100,000 $ 105,000 $ 110,250 $ 115,763 $ 121,551
Taxes (30,000) (31,500) (33,075) (34,729) (36,465)
NOPAT $ 70,000 $ 73,500 $ 77,175 $ 81,034 $ 85,085
Plus: Depreciation 80,000 80,000 80,000 80,000 80,000
Less: CAPEX (400,000) - - - - -
Less: Net working capital needs (See Note 1) (20,000) (1,000) (1,050) (1,103) (1,158) 24,310 Note 1: At the end of year 5 the firm
Plus: Salvage value of the fixed assets in year 5 - liquidates all of it's investment in net
Firm Free Cash Flow (FFCF) $ (420,000) $ 149,000 $ 152,450 $ 156,073 $ 159,876 $ 189,396 operating working capital.

Net Fixed Assets (beginning of the year) $ - $ 400,000 $ 320,000 $ 240,000 $ 160,000 $ 80,000
Plus: CAPEX 400,000 - - - - -
Less: Depreciation Expense for the Year - (80,000) (80,000) (80,000) (80,000) (80,000)
Net Fixed Assets (end of the year) $ 400,000 $ 320,000 $ 240,000 $ 160,000 $ 80,000 $ -

Page 5
 Problem 2-6

PROBLEM 2-6

Given Solution Legend

TCM Petroleum Dec-14 Dec-15 = Value given in problem
Sales $12,211.00 $13,368.00 = Formula/Calculation/Analysis required
Cost of Goods Sold (9,755.00) (10,591.00) = Qualitative analysis or Short answer required
Gross Profit 2,456.00 2,777.00
Selling, General, & Administrative Expense (704.00) (698.00)
Operating Income Before Deprec. 1,752.00 2,079.00
Depreciation, Depletion, & Amortization (794.00) (871.00)
Operating Profit (NOI) 958.00 1,208.00
Interest Expense (265.00) (295.00)
Non-Operating Income/Expense 139.00 151.00
Special Items 20.00 -
Pretax Income 852.00 1,064.00
Total Income Taxes (340.80) (425.60)
Net Income $ 511.20 $ 638.40
CAPEX estimated as follows:
CAPEX = NET PP&E ending + Depreciation - NET
PP&E beginning
Purchase of PP&E (CAPEX) 875 1,322
Increase in Net Working Capital 102 (430)
Increase in Net Working Capital estimated as follows:
TCM's average tax rate 40% 40% NWC 2015 - NWC 2014

Solution
a. FCF Calculations for 2014-2015 Year
2014 2015 Note that we are calculating only the firm's FCF from
Net Operating Income (NOI) $ 958 $ 1,208 its operations. Specifically, in 2014 TCM had
NOI(1-T) = NOPAT 575 725 nonoperating income of $151 million and in in 2015
Plus: Depreciation Expense 794 871 the firm had nonoperating income plus special items
totaling $159 million. Although these items are not
Less: CAPEX (875) (1,322)
from the firm's normal operations, they do constitute
Less: Working Capital Investment (102) 430 cash flows and if we were trying to value the firm we
Firm Free Cash Flow $ 392 $ 704 would want to include their value in the analysis
(more about this in Chapter 8).
b. Estimated FCF for 2016-2015 Year
2016 2017 2018 2019 2020
NOI (Growing at 10% per year) $ 1,329 $ 1,462 $ 1,608 $ 1,769 $ 1,945
NOI (1-.40) = NOPAT 797 877 965 1,061 1,167
Plus: Depreciation Expense 1,003 1,103 1,203 1,303 1,403
Less: CAPEX (1,000) (1,000) (1,000) (1,000) (1,000)
Less: Working Capital Investment (100) (100) (100) (100) (100)
Firm Free Cash Flow (FCF) $ 700 $ 880 $ 1,068 $ 1,264 $ 1,470

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 PROBLEM 2-8

Given Solution Legend

Initial Investment in software $ (55,000) = Value given in problem
Technician training cost $ (10,000) = Formula/Calculation/Analysis required
Hourly Rate $ 25.00 = Qualitative analysis or Short answer requ
Tax Rate 30%
Discount Rate 9%
Additional Investment per year for $ 15,000
software upgrades
% Reduction in hours of technician 25%
time for installation
Total hours of installation per year 6,000

Solution
Year
Year 0 1 2 3 4
Rev $ 37,500 $ 37,500 $ 37,500 $ 37,500
Upgrade Expense (15,000) (15,000) (15,000) (15,000)
EBIT $ 22,500 $ 22,500 $ 22,500 $ 22,500
Less: Taxes (6,750) (6,750) (6,750) (6,750)
NOPAT $ 15,750 $ 15,750 $ 15,750 $ 15,750
Plus: DEP - - - -
Less: CAPEX (65,000) - - - -
Project Free Cash Flows (PFCF) $ (65,000) $ 15,750 $ 15,750 $ 15,750 $ 15,750

NPV $ (3,738)
IRR 6.76%
Payback Period 4.13
on Legend
n problem
ulation/Analysis required
nalysis or Short answer required

5
$ 37,500
(15,000)
$ 22,500
(6,750)
$ 15,750
-
-
$ 15,750
 PROBLEM 2-9

Given Solution Lege

Investment (CAPEX in year 0) $ (600,000) = Value given in problem
Depreciable life 5 years = Formula/Calculation/Anal
Initial units for year 1 100,000 = Qualitative analysis or Sh
Revenue per unit 1.50
Growth Rate per year in units 25%
Tax Rate 30%
Disposal cost per unit $ 0.20
Required Return 15%

Solution: Part a
Year
0 1 2 3 4
Units recycled 100,000 125,000 156,250 195,313
Revenues $ 150,000 $ 187,500 $ 234,375 $ 292,969
Depreciation Expense (120,000) (120,000) (120,000) (120,000)
EBIT $ 30,000 $ 67,500 $ 114,375 $ 172,969
Less: Taxes (9,000) (20,250) (34,313) (51,891)
NOPAT $ 21,000 $ 47,250 $ 80,063 $ 121,078
Plus: Depreciation expense 120,000 120,000 120,000 120,000
Less: CAPEX (600,000) - - - -
Project Free Cash Flows $ (600,000) $ 141,000 $ 167,250 $ 200,063 $ 241,078

Solution: Part b

NPV 63,804
IRR 18.87%

Solution: Part c

Year
0 1 2 3 4
Units recycled 75,000 93,750 117,188 146,484
Revenues $ 112,500 $ 140,625 $ 175,781 $ 219,727
Depreciation Expense (120,000) (120,000) (120,000) (120,000)
EBIT $ (7,500) $ 20,625 $ 55,781 $ 99,727
Less: Taxes 2,250 (6,188) (16,734) (29,918)
NOPAT $ (5,250) $ 14,438 $ 39,047 $ 69,809
Plus: Depreciation expense 120,000 120,000 120,000 120,000
Less: CAPEX (600,000) - - - -
Project Free Cash Flows $ (600,000) $ 114,750 $ 134,438 $ 159,047 $ 189,809

NPV $ (71,978)
IRR 10.36%

The investment does not look like a good one with a negative NPV.
 Solution: Part d

Year
0 1 2 3 4
Units recycled 100,000 125,000 156,250 195,313
Revenues $ 150,000 $ 187,500 $ 234,375 $ 292,969
Disposal cost (20,000) (25,000) (31,250) (39,063)
Depreciation Expense (120,000) (120,000) (120,000) (120,000)
EBIT $ 10,000 $ 42,500 $ 83,125 $ 133,906
Less: Taxes (3,000) (12,750) (24,938) (40,172)
NOPAT $ 7,000 $ 29,750 $ 58,188 $ 93,734
Plus: Depreciation expense 120,000 120,000 120,000 120,000
Less: CAPEX (600,000) - - - -
Project Free Cash Flows $ (600,000) $ 127,000 $ 149,750 $ 178,188 $ 213,734

NPV (8,613)
IRR 14.46%

The investment does not look like a good one with a negative NPV.
 Solution Legend
Value given in problem
Formula/Calculation/Analysis required
Qualitative analysis or Short answer required

5
244,141
$ 366,211
(120,000)
$ 246,211
(73,863)
$ 172,348
120,000
-
$ 292,348

5
183,105
$ 274,658
(120,000)
$ 154,658
(46,397)
$ 108,261
120,000
-
$ 228,261
 5
244,141
$ 366,211
(48,828)
(120,000)
$ 197,383
(59,215)
$ 138,168
120,000
-
$ 258,168
 Problem 2-12

PROBLEM 2-12

Given
Machine cost $ 760,000
Depreciation Straight line
Annual cost savings 250,000
Machine life 5 The solution below corresponds to
Salvage value (before tax) - parts a and b. of the problem. To
solve for part c. simply substitute
Tax rate 30%
$200,000 for the annual cost
Discount rate 9% savings.

Solution
Year
Analysis of Cash Flows 0 1 2 3 4
Additional revenues (cost savings) 250,000 250,000 250,000 250,000
Less: Depreciation expense (152,000) (152,000) (152,000) (152,000)
Additional EBIT $ 98,000 $ 98,000 $ 98,000 $ 98,000
Less: Taxes (29,400) (29,400) (29,400) (29,400)
NOPAT $ 68,600 $ 68,600 $ 68,600 $ 68,600
Plus: Depreciation 152,000 152,000 152,000 152,000
Less: Capex (760,000) - - - -
Less: Change in NWC - - - - -
Project Free Cash Flow $ (760,000) $ 220,600 $ 220,600 $ 220,600 $ 220,600

Assessment of Project Value

NPV $ 98,057.07
IRR 13.85%
Payback 3.45 years

Page 13
 Problem 2-12

Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required

5
250,000
(152,000)
$ 98,000
(29,400)
$ 68,600
152,000
-
-
$ 220,600

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