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Rockyford Company must replace some machinery that has zero book value and a current market value of $3,000. One possibility is to invest in new machinery costing $52,000. This new machinery would produce estimated annual pretax cash operating savings of $20,800. Assume the new machine will have a useful life of 4 years and depreciation of $13,000 each year for book and tax purposes. It will have no salvage value at the end of 4 years. The investment in this new machinery would require an additional $4,200 investment of net working capital. (Assume that when the old machine was purchased, the incremental net working capital required at the time was $0.) If Rockyford accepts this investment proposal, the disposal of the old machinery and the investment in the new one will occur on December 31 of this year. The cash flows from the investment are expected to occur over a four-year period. Rockyford is subject to a 40% income tax rate for all ordinary Income and capital gains and has a 8% weighted-average after-tax cost of capital. All operating and tax cash flows are assumed to occur at year-end. (For Parts 2 and 3, use the relevant table from Appendix C-Table 1 or Table 2.) Required: 1. Determine the after-tax cash flow arising from disposing of the old machinery. 2. Determine the present value of the after-tax cash flows for the next 4-years attributable to the cash operating savings. 3. Determine the present value of the tax shield effect of depreciation for year 1. 4. Which one of the following is the proper treatment for the additional $4,200 of net working capital required in the current year?

Rockyford Company must replace some machinery that has zero book value and a current market value of $3,000. One possibility is to invest in new machinery costing $52,000. This new machinery would produce estimated annual pretax cash operating savings of $20,800. Assume the new machine will have a useful life of 4 years and depreciation of $13,000 each year for book and tax purposes. It will have no salvage value at the end of 4 years. The investment in this new machinery would require an additional $4,200 investment of net working capital. (Assume that when the old machine was purchased, the incremental net working capital required at the time was $0.) If Rockyford accepts this investment proposal, the disposal of the old machinery and the investment in the new one will occur on December 31 of this year. The cash flows from the investment are expected to occur over a four-year period. Rockyford is subject to a 40% income tax rate for all ordinary Income and capital gains and has a 8% weighted-average after-tax cost of capital. All operating and tax cash flows are assumed to occur at year-end. (For Parts 2 and 3, use the relevant table from Appendix C-Table 1 or Table 2.) Required: 1. Determine the after-tax cash flow arising from disposing of the old machinery. 2. Determine the present value of the after-tax cash flows for the next 4-years attributable to the cash operating savings. 3. Determine the present value of the tax shield effect of depreciation for year 1. 4. Which one of the following is the proper treatment for the additional $4,200 of net working capital required in the current year?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Q A Z TABLE 2 Present Value of Annuity of $1 Periods 1 2 3 4 5 6 - 7 - 8 - 9 10 11 12 13 14 15 16 17 18 19 20 22 24 25 30 35 40 2 command 4% 0.962 1.886 2.775 Com 3.630 Skee 4.452 5,242 6.002 6.733 7.435 8.111 www 8.760 S B H 9.385 - 9.986 www 10.563 wwwwww 11.118 BEAU 11.652 - 12.166 LEON 13.134 13:154 W 13.590 ww 14.451 15.247 15.622 17.292 18.665 19.793 X 5% 0.952 1.859 2.723 3.546 1000 4.329 - 6% 8% 0.943 0.926 1.833 1.783 2.673 2.624 2.577 3.465 3.387 3.312 4.212 4.100 3.993 5.076 4.917 4.767 4.623 5.786 5.582 5.389 5,206 6.463 6.210 5.971 5.747 7.108 6.802 6.515 6.247 7.722 7.360 7.024 6.710 8.306 7.887 7.499 7.139 8.384 7.943 7.536 8.853 8.358 7.904 wor 8.745 8.244 9.108 8.559 dady 9.447 8.851 - 8.863 - 9.394 - 9.899 22 10.380 B 12.659 11.690 LENOS 1000 10.838 Barc 11.274 MWIN 12.085 - 12.462 3 - # 20 E D C 9.295 www 9.712 SE 10.106 Portion 10.477 wwwww 10.828 - 11.158 - 11.470 a F 12.042 Lady 12.550 $ 4 R 7% 0.935 1.808 F 9.763 21199 10.059 LUNOS 10.336 Lowod 10.594 000 800 11.061 11:.0001 11.469 11.654 12.409 13.163 13.799 8.348 14.094 12.783 - 10.675 9.077 8.422 7.843 6.873 15.372 13.765 11.258 9.427 8.694 8.055 7.003 16.374 11.655 10.567 9.644 8.855 8.176 7.586 7.070 14.498 17.159 15.046 11.925 10.757 9.779 8.951 8.244 7,634 7.105 6,642 Note: The present value (PV) annuity factor for N periods and a rate of r per period - [1-(1+1) "1r. For example, for N-5 and r=0.10, the PV annuity factor-3.791 (rounded). 12.948 13.332 V % 3:124 9.122 9.372 9.604 0.919 9.818 5 10.301 10.201 10.529 T FS 9% 0.917 1.759 2.531 3.240 3.890 4.486 B 5.033 5.535 5.995 6.418 6.805 7.161 4.868 5.335 5.759 6.145 6.495 6.814 7.487 7.103 7.786 7.367 8.061 7.606 8.313 7.824 8.544 8.022 8.756 8.201 8.950 8.365 9.129 8.514 - 8.772 9.442 9.707 9.823 10.274 6 A 10% 11% 12% 14% 13% 0.893 0.885 0.877 0.909 1.736 0.901 1.713 1.690 1.668 2.444 2.402 2.361 2.487 1.647 2.322 2.914 3.170 3.102 2.974 3.037 3.791 3.696 3.605 3.517 3.433 4.355 4,231 4.712 4.111 4.564 4.968 5.537 5.328 5.132 5.146 3.998 3.889 3.784 4.423 4,288 4.160 4.799 4.639 4.487 4.946 4.772 5.889 5.650 5.426 5.216 5.019 6.207 5.938 5.687 5453 6.492 6.194 6.750 6.424 5.918 6.122 6.302 5.660 5.842 6.002 6.982 6.628 7.191 6,811 6.462 7.379 6.974 6.604 7.549 7.120 6.729 6.840 Y - H 8.985 7.702 7.839 Masse MacBook Air & 7 7 N 7.963 Le 8.176 F7 U 7.250 7.366 wwwww 7.469 7.645 7.784 J * 8 ➤11 M FB 7 I 6.938 7.025 Lekke 7.170 www 7.283 7.330 7.496 ( 9 6.142 6.265 K 6.373 - 6.467 Skor 6.550 wwwww 6.623 wwww 6.743 6.835 F9 O < " L 15% 20% 0.870 0.833 1.626 1.528 1.440 2,283 2.106 1.952 2.855 2.589 2.362 3.352 2.991 2.689 3.326 3.605 3.837 3.329 4.031 3.463 4.192 3.571 4.327 3.656 4.439 3.725 3.780 3.824 3.859 3.887 4.775 3.910 4.812 3.928 3.942 3.954 5.234 5421 5.583 4.533 5.724 4.611 5.847 4.675 5.954 4.730 6.047 - 6.128 Lentes 4.843 4.870 4.870 4.909 4.937 4.948 4.979 6.617 4.992 4.997 ) O 6.198 9:30 6.259 6.359 0.339 6.434 0.434 6.464 6.566 command F10 P A. - - : ; 4 25% 0.800 3.970 3.981 3.985 3.995 30% 0.769 1.361 1.816 2.166 2.436 2.643 2.951 3.161 2.802 2.925 3.019 3.092 3.147 3.190 3,223 3.249 3.268 3.283 3.998 3.999 F11 alt option { [ + ? 3.323 3.327 3.329 3.332 3.333 3.333 , 11 = 1 3.295 3.304 3.311 3.316 ◄) F12 1 T : . G del
Transcribed Image Text:Q A Z TABLE 2 Present Value of Annuity of $1 Periods 1 2 3 4 5 6 - 7 - 8 - 9 10 11 12 13 14 15 16 17 18 19 20 22 24 25 30 35 40 2 command 4% 0.962 1.886 2.775 Com 3.630 Skee 4.452 5,242 6.002 6.733 7.435 8.111 www 8.760 S B H 9.385 - 9.986 www 10.563 wwwwww 11.118 BEAU 11.652 - 12.166 LEON 13.134 13:154 W 13.590 ww 14.451 15.247 15.622 17.292 18.665 19.793 X 5% 0.952 1.859 2.723 3.546 1000 4.329 - 6% 8% 0.943 0.926 1.833 1.783 2.673 2.624 2.577 3.465 3.387 3.312 4.212 4.100 3.993 5.076 4.917 4.767 4.623 5.786 5.582 5.389 5,206 6.463 6.210 5.971 5.747 7.108 6.802 6.515 6.247 7.722 7.360 7.024 6.710 8.306 7.887 7.499 7.139 8.384 7.943 7.536 8.853 8.358 7.904 wor 8.745 8.244 9.108 8.559 dady 9.447 8.851 - 8.863 - 9.394 - 9.899 22 10.380 B 12.659 11.690 LENOS 1000 10.838 Barc 11.274 MWIN 12.085 - 12.462 3 - # 20 E D C 9.295 www 9.712 SE 10.106 Portion 10.477 wwwww 10.828 - 11.158 - 11.470 a F 12.042 Lady 12.550 $ 4 R 7% 0.935 1.808 F 9.763 21199 10.059 LUNOS 10.336 Lowod 10.594 000 800 11.061 11:.0001 11.469 11.654 12.409 13.163 13.799 8.348 14.094 12.783 - 10.675 9.077 8.422 7.843 6.873 15.372 13.765 11.258 9.427 8.694 8.055 7.003 16.374 11.655 10.567 9.644 8.855 8.176 7.586 7.070 14.498 17.159 15.046 11.925 10.757 9.779 8.951 8.244 7,634 7.105 6,642 Note: The present value (PV) annuity factor for N periods and a rate of r per period - [1-(1+1) "1r. For example, for N-5 and r=0.10, the PV annuity factor-3.791 (rounded). 12.948 13.332 V % 3:124 9.122 9.372 9.604 0.919 9.818 5 10.301 10.201 10.529 T FS 9% 0.917 1.759 2.531 3.240 3.890 4.486 B 5.033 5.535 5.995 6.418 6.805 7.161 4.868 5.335 5.759 6.145 6.495 6.814 7.487 7.103 7.786 7.367 8.061 7.606 8.313 7.824 8.544 8.022 8.756 8.201 8.950 8.365 9.129 8.514 - 8.772 9.442 9.707 9.823 10.274 6 A 10% 11% 12% 14% 13% 0.893 0.885 0.877 0.909 1.736 0.901 1.713 1.690 1.668 2.444 2.402 2.361 2.487 1.647 2.322 2.914 3.170 3.102 2.974 3.037 3.791 3.696 3.605 3.517 3.433 4.355 4,231 4.712 4.111 4.564 4.968 5.537 5.328 5.132 5.146 3.998 3.889 3.784 4.423 4,288 4.160 4.799 4.639 4.487 4.946 4.772 5.889 5.650 5.426 5.216 5.019 6.207 5.938 5.687 5453 6.492 6.194 6.750 6.424 5.918 6.122 6.302 5.660 5.842 6.002 6.982 6.628 7.191 6,811 6.462 7.379 6.974 6.604 7.549 7.120 6.729 6.840 Y - H 8.985 7.702 7.839 Masse MacBook Air & 7 7 N 7.963 Le 8.176 F7 U 7.250 7.366 wwwww 7.469 7.645 7.784 J * 8 ➤11 M FB 7 I 6.938 7.025 Lekke 7.170 www 7.283 7.330 7.496 ( 9 6.142 6.265 K 6.373 - 6.467 Skor 6.550 wwwww 6.623 wwww 6.743 6.835 F9 O < " L 15% 20% 0.870 0.833 1.626 1.528 1.440 2,283 2.106 1.952 2.855 2.589 2.362 3.352 2.991 2.689 3.326 3.605 3.837 3.329 4.031 3.463 4.192 3.571 4.327 3.656 4.439 3.725 3.780 3.824 3.859 3.887 4.775 3.910 4.812 3.928 3.942 3.954 5.234 5421 5.583 4.533 5.724 4.611 5.847 4.675 5.954 4.730 6.047 - 6.128 Lentes 4.843 4.870 4.870 4.909 4.937 4.948 4.979 6.617 4.992 4.997 ) O 6.198 9:30 6.259 6.359 0.339 6.434 0.434 6.464 6.566 command F10 P A. - - : ; 4 25% 0.800 3.970 3.981 3.985 3.995 30% 0.769 1.361 1.816 2.166 2.436 2.643 2.951 3.161 2.802 2.925 3.019 3.092 3.147 3.190 3,223 3.249 3.268 3.283 3.998 3.999 F11 alt option { [ + ? 3.323 3.327 3.329 3.332 3.333 3.333 , 11 = 1 3.295 3.304 3.311 3.316 ◄) F12 1 T : . G del
ital Budgets Saved Rockyford Company must replace some machinery that has zero book value and a current market value of $3,000. One possibility is to invest in new machinery costing $52,000. This new machinery would produce estimated annual pretax cash operating savings of $20,800. Assume the new machine will have a useful life of 4 years and depreciation of $13,000 each year for book and tax purposes. It will have no salvage value at the end of 4 years. The investment in this new machinery would require an additional $4,200 investment of net working capital. (Assume that when the old machine was purchased, the incremental net working capital required at the time was $0.) If Rockyford accepts this investment proposal, the disposal of the old machinery and the investment in the new one will occur on December 31 of this year. The cash flows from the investment are expected to occur over a four-year period. Rockyford is subject to a 40% income tax rate for all ordinary income and capital gains and has a 8% weighted-average after-tax cost of capital. All operating and tax cash flows are assumed to occur at year-end. (For Parts 2 and 3, use the relevant table from Appendix C-Table 1 or Table 2.) Help Required: 1. Determine the after-tax cash flow arising from disposing of the old machinery. 2. Determine the present value of the after-tax cash flows for the next 4-years attributable to the cash operating savings. 3. Determine the present value of the tax shield effect of depreciation for year 1. 4. Which one of the following is the proper treatment for the additional $4,200 of net working capital required in the current year?
Transcribed Image Text:ital Budgets Saved Rockyford Company must replace some machinery that has zero book value and a current market value of $3,000. One possibility is to invest in new machinery costing $52,000. This new machinery would produce estimated annual pretax cash operating savings of $20,800. Assume the new machine will have a useful life of 4 years and depreciation of $13,000 each year for book and tax purposes. It will have no salvage value at the end of 4 years. The investment in this new machinery would require an additional $4,200 investment of net working capital. (Assume that when the old machine was purchased, the incremental net working capital required at the time was $0.) If Rockyford accepts this investment proposal, the disposal of the old machinery and the investment in the new one will occur on December 31 of this year. The cash flows from the investment are expected to occur over a four-year period. Rockyford is subject to a 40% income tax rate for all ordinary income and capital gains and has a 8% weighted-average after-tax cost of capital. All operating and tax cash flows are assumed to occur at year-end. (For Parts 2 and 3, use the relevant table from Appendix C-Table 1 or Table 2.) Help Required: 1. Determine the after-tax cash flow arising from disposing of the old machinery. 2. Determine the present value of the after-tax cash flows for the next 4-years attributable to the cash operating savings. 3. Determine the present value of the tax shield effect of depreciation for year 1. 4. Which one of the following is the proper treatment for the additional $4,200 of net working capital required in the current year?
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