
Concept explainers
a)
To determine: Cash flows at year 0.
a)

Explanation of Solution
Calculation of cash flows at year 0:
Therefore, the year 0 cash flow is -$89,000
b)
To determine: Net operating cash flows for 3 years.
b)

Explanation of Solution
Calculation of
Cost of the machine is $85,000 ($70,000+$15,000)
Calculation of operating cash flows:
Therefore, the net operating cash flow at year 1 is $26,332.4
Therefore, the net operating cash flow at year 2 is $30,113.2
Therefore, the net operating cash flow at year 2 is $20,035.6
c)
To determine: Additional year-3 cash flow required.
c)

Explanation of Solution
Book value is $6,298.50
Calculation of profit on sale:
Therefore, profit on sale is $23,701.50
Calculation of taxes on salvage value:
Therefore, taxes on salvage value is $20,519.40
Calculation of additional cash flow at year 3:
Therefore, additional cash flow required is $24,519.40
d)
To determine: Whether the firm should accept the project or not.
d)

Explanation of Solution
Calculation of NPV:
Excel workings:
Excel spread sheet:
Therefore, the
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Chapter 13 Solutions
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