Tutorial WEEK 12 PDF

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TUTORIAL WEEK 12 21.23 Cost of new water tank (time 0) (28 250) Present value of annual savings (5000 x 6.71) 33 550 Net present value 5 300 The management committee should approve the new water banks because the project’s NPV is positive. 21.24 Annuity discount factor associated with the IRR: = initial cash outflow/annual cost savings = 28 250/5000 =5650 From the table 4 in appendix, this annuity discount factor falls in the 12 percent column. Hence, the project’s IRR is 12 percent. The management committee should approve the new water tank because the project’s IRR is greater than the hurdle rate of 8 percent. 21.27 1. payback period: 3 years The accumulated incremental cashflows total 165 500 (50 000+ 55 000 + 60 500) in the first three years which equals the initial investment in advertising of 165 500 2. Year Revenue Expense Cash flows Factor Value 1 75 000 25 000 50 000 0.909 45 450 2 82 500 27 500 55 000 0.826 45 430 3 90 750 30 250 60 500 0.751 45 435 4 99 825 33 275 66 550 0.683 45 454 5 109 808 36 603 73 205 0.621 45 460 Present value of incremental cash flows 227 229 Less initial advertising expenditure 165 500 Net present value 61 729 21.28 Year

Incremental Operating Incremental Incremental net revenue expenses depreciation profit 1 50 000 20 000 20 000 10 000 2 50 000 20 000 20 000 10 000 3 50 000 20 000 20 000 10 000 4 50 000 20 000 20 000 10 000 5 50 000 20 000 20 000 10 000 6 50 000 20 000 20 000 10 000 Accounting rate of return = average incremental net profit / initial investment = 10 000/120 000 = 8.33%

21.30 CARRYING AMOUNT=acquisition cost – accumulated depreciation = 150 000 – 116 535 = 33 465 LOSS ON SALE= carrying amount – proceeds of sale = 33 465 – 27 765 = 5700 Reduced cash outflows from the tax deduction from the loss of sale (5700 x 0.33) 1 881 Proceeds of sale 27 765 Total after tax cash flow 29 646...