Chapter 11 Solutions
CAPITAL BUDGETING PROBLEMS: CHAPTER 11
Answers to Warm-Up Exercises
E11-1.
Categorizing a firm’s expenditures
Answer: In this case, the tuition reimbursement should be categorized as a capital expenditure since the outlay of funds is expected to produce benefits over a period of time greater than 1 year.
E11-2.
Classification of project costs and cash flows
Answer: $3.5 billion already spent—sunk cost (irrelevant)
$350 million incremental cash outflow—relevant cash flow
$15 million per year cash inflow—relevant cash flow
$450 million for satellites—opportunity cost and relevant cash flow
E11-3.
Finding the initial investment
Answer: $20,000 Purchase price of new machinery
$3,000 Installation costs
$4,500 After-tax proceeds from sale of old machinery
$18,500 Initial investment
E11-4.
Book value and recaptured depreciation
Answer: Book value
$175,000
Recaptured depreciation
E11-5.
$124, 250
$50,750
$110,000
$50, 750
$59,250
Initial investment
Answer: Initial investment
purchase price installation costs – after-tax proceeds from sale of old asset change in net working capital
$55,000 $7,500 – $23,750 $2,000 $40,750
CAPITAL BUDGETING PROBLEMS: CHAPTER 11
Solutions to Problems
Note: The MACRS depreciation percentages used in the following problems appear in Chapter 4,
Table 4.2. The percentages are rounded to the nearest integer for ease in calculation.
For simplification, 5-year-lived projects with 5 years of cash inflows are typically used throughout this chapter. Projects with usable lives equal to the number of years of cash inflows are also included in the end-of-chapter problems. It is important to recall from Chapter 4 that under the Tax Reform Act of 1986,
MACRS depreciation results in n 1 years of depreciation for an n-year class asset. This means that in actual practice projects will typically have at least one year of cash flow beyond their recovery period.
P11-1. Classification of expenditures
LG 2; Basic
a.
b.
c.
d.
e.
f.
g.
h.
Answers to Warm-Up Exercises
E11-1.
Categorizing a firm’s expenditures
Answer: In this case, the tuition reimbursement should be categorized as a capital expenditure since the outlay of funds is expected to produce benefits over a period of time greater than 1 year.
E11-2.
Classification of project costs and cash flows
Answer: $3.5 billion already spent—sunk cost (irrelevant)
$350 million incremental cash outflow—relevant cash flow
$15 million per year cash inflow—relevant cash flow
$450 million for satellites—opportunity cost and relevant cash flow
E11-3.
Finding the initial investment
Answer: $20,000 Purchase price of new machinery
$3,000 Installation costs
$4,500 After-tax proceeds from sale of old machinery
$18,500 Initial investment
E11-4.
Book value and recaptured depreciation
Answer: Book value
$175,000
Recaptured depreciation
E11-5.
$124, 250
$50,750
$110,000
$50, 750
$59,250
Initial investment
Answer: Initial investment
purchase price installation costs – after-tax proceeds from sale of old asset change in net working capital
$55,000 $7,500 – $23,750 $2,000 $40,750
CAPITAL BUDGETING PROBLEMS: CHAPTER 11
Solutions to Problems
Note: The MACRS depreciation percentages used in the following problems appear in Chapter 4,
Table 4.2. The percentages are rounded to the nearest integer for ease in calculation.
For simplification, 5-year-lived projects with 5 years of cash inflows are typically used throughout this chapter. Projects with usable lives equal to the number of years of cash inflows are also included in the end-of-chapter problems. It is important to recall from Chapter 4 that under the Tax Reform Act of 1986,
MACRS depreciation results in n 1 years of depreciation for an n-year class asset. This means that in actual practice projects will typically have at least one year of cash flow beyond their recovery period.
P11-1. Classification of expenditures
LG 2; Basic
a.
b.
c.
d.
e.
f.
g.
h.