For
PROPRIETARY MATERIAL.
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13- 1
Chapter 13
13.1
13.2
(a)
Doubleday:
Doubleday:
13.3
(a)
Te
TI
Doubleday
M-D
40.07%
38.95%
$1,450,000 $880,000
Tax
estimate
Tax (table)
% revenue
$493,000
$493,000
13.3%
$299,200
$299,200
6.0%
(c)
13.5
13.6
13.7
Single:
13- 3
(b) Using tax rate Tables 13-1 (corporate) and 13-2 (filing single).
Ads++:
TI = $105,000
Taxes = 22,250 + 0.39(105,000-100,000)
= $24,200
Single:
TI = $86,550
Taxes = 0.10(7825) + 0.15(31,850-7825)
+ 0.25(77,100-31,850) + 0.28(86,550-77,100)
= 783 + 3604 + 11,313 + 2646
= $18,346
The 25% estimated rate is too high since both corporate and individual tax
estimates are higher than the tax table amounts.
13.8
Do not reject yet. Since the 40% rate is tax rate estimate and AW is close to 0, any
of the following should be done next:
Check estimates in CFBT (GI and expenses) for more accuracy
Use tax rate tables to determine income tax effect on AW
Consider non-economic factors that may signify acceptance or rejection
13.9
13.10 Determine MACRS depreciation, taxes and CFAT. Assume negative tax will
increase CFAT and AW.(All $ values are in $1000 units.)
TI = GI E - Depr
CFAT = CFBT - taxes
13- 4
Year GI
E
P and S CFBT
0
$-1900 $-1900
1
$800 $-100
700
2
950 -150
800
3
600 -200
400
4
300 -250
700
750
Depr
TI
$633 $ 67
845 -45
281 119
141 -91
Taxes
CFAT
$-1900
$23
677
-16
816
42
358
-32
782
13- 5
13.13 From Equations [13.6] and [13.7], GI can be determined from the data provided.
CFBT = CFAT + taxes
GI E = CFAT + (GI E D)(Te)
Solve for GI to obtain a general relation for each year t.
GIt = [CFAT + E(1- Te) - DTe]/ (1- Te)
where CFA T = $2.5 million
Te = 8% + (1-0.08)(20%) = 26.4%
1- Te = 0.736
Year 1:GI1 = [2.5 million + 650,000(0.736) 650,000(0.264)]/0.736
= $3,813,587
Year 2:GI2 = [2.5 million + 900,000(0.736) 900,000(0.264)]/0.736
= $3,973,913
Year 3:GI3 = [2.5 million + 1,150,000(0.736) 1,150,000(0.264)]/0.736
= $4,134,239
13.14 (a) Find BV after 2 years of MACRS depreciation.
BV2 = 350,000 70,000 112,000 = $168,000
(b) Solve PW = 0 relation of CFBT values for i*
Year Savings Expenses P and S CFBT
0
-350,000 -350,000
1
150,000
-25,000
125,000
2
150,000
-25,000 168,000 293,000
0 = -350,000 + 125,000(P/F,i,1) + 293,000(P/F,i,2)
13- 6
i* = 11.1%
Savings
P and S
-350,000
150,000
150,000
-25,000
-25,000
168,000
Depr
70,000
112,000
TI
Taxes
55,000 22,000
13,000 5,200
CFAT
-350,000
103,000
287,800
13.15 (a)
Year
0
1
2
3
4
CFBT = GI E P + S
CFAT = GI E P + S (GI-E-D)(Te)
P and S
-150,000
GI
60,000
75,000
90,000
10,000 105,000
E
-55,000
-50,000
-45,000
-40,000
13- 7
CFBT
-150,000
5,000
25,000
45,000
75,000
Depr
TI
Taxes
CFAT
-150,000
14,600
28,200
41,800
65,400
13- 8
CFAT
-100,000
23,500
23,500
23,500
4
5
25,000
25,000
20,000 5,000
20,000 20,000 5,000
1,500
1,500
23,500
43,500
13- 9
13.20 (a)
Year
0
1
2
3
4
5
GI - E
25,000
25,000
25,000
25,000
25,000
P and SP
-100,000
Depr
TI
Taxes
CFAT
-100,000
27,500
30,833
21,944
19,722
31,500
GI - E
25,000
25,000
25,000
25,000
25,000
P and SP
-100,000
Depr
TI
Taxes
CFAT
-100,000
29,500
24,700
21,820
17,980
37,500
13.22 Spreadsheet solution for problems 13.19-13.21 and this problem follows.
Best country selections:
Country 1 -- total taxes, PW of taxes and CFAT
Country 2 -- PW of depreciation
Highest PW of depreciation is selected, so MACRS (country 2) wins here. Taxes
are best when low (country 1). Country 1 wins on PW of CFAT, even though SL
depreciation is applied, because the DR in year 5 is not taxed. This increases the
CFAT considerably in this last year.
13- 11
PWtax = 3720(P/A,12%,6)
= 3720(4.1114)
= $15,294
Recovery in 3 years has a lower PWtax value; total taxes are the same for both.
Spreadsheet solution follows.
13.24
P and CFBT
-200,000
75,000
75,000
75,000
75,000
75,000
75,000
75,000
75,000
Rate
0.2000
0.3200
0.1920
0.1152
0.1152
0.0576
0
0
Depr
40,000
64,000
38,400
23,040
23,040
11,520
0
0
TI
35,000
11,000
36,600
51,960
51,960
63,480
75,000
75,000
Taxes
13,300
4,180
13,908
19,745
19,745
24,122
28,500
28,500
$152,000
13- 12
13- 13
DR = SP BV = 5,000
Tax on DR = 5,000(0.35) = $1750
Challenger first cost = -24,000 - 1750 = $-25,750
MACRS depreciation is based on $24,000 first cost
Year
0
1
2
3
4
Exp
-8000
-8000
-8000
-8000
P and S
-25,750
Rate
0.3333
0.4445
0.1481
0.0741
Depr
TI
Taxes
CFAT
-25,750
8,000 -16,000 -5,600 -2,400
10,668 -18,668 -6,534 -1,466
3,554 -11,554 -4,044 -3,956
1,778 -9,778 -3,422 -4,578
13.29 Determine AWC and compare it with AWD = $2100. Defender has DR on trade
since BV = 0 now.
DR = SP BV = 25,000 0 = $25,000
Tax on DR = 25,000(0.3) = $7500
Challenger first cost = -75,000 7500 = $-82,500
SL depreciation = (75,000-15,000)/10 = $6000 per year
Year 1-10 CFAT = CFBT (CFBT - D)( Te )
= 15,000 (15,000 6000)(0.3)
= $12,300
13- 14
Charlotte: equity
13- 15
(b) Debt capital gets a tax break; equity does not. From Equation [13.16]
After-tax cost of debt = 9.8%(1-0.32) = 6.664%
After-tax WACC = equity cost + debt cost
= 4/15(7.4%) + 6/15(4.8%) + 5/15(6.664%)
= 6.11%
After-tax MARR = 6.11 + 4.0 = 10.11%
13.37 (a) Credit card is debt financing, while a debit card is equity financing.
(b) Find FW, the amount paid on debt at end of one year.
Justin: FW = 6590(1.105) = $7282
Total = 7282 + 2300 = $9582
Debt % = 7282/9582 = 76%
Greg: FW = 2300(1.105) = $2542
Total = 2542 + 6590 = $9132
Debt % = 2542/9132 = 28%
Debt, $ Credit, $ Total, $ D-E mix
Justin 7282
2300
9582
76/24
Greg 2542
6590
9132
28/72
13.38 (a) Determine the after-tax cost of debt capital and WACC.
After-tax cost of debt capital = 10(1-0.36) = 6.4%
After-tax WACC = 0.65(14.5%) + 0.35(6.4%)
= 11.665%
Interest charged to revenue for the project:
14.0 million(0.11665) = $1,633,100
(b) After-tax WACC = 0.25(14.5%) + 0.75(6.4%)
= 8.425%
Interest charged to revenue for the project:
14.0 million(0.08425) = $1,179,500
As more and more of capital investment is borrowed, the company risks higher
loan rates and owns less and less of itself. Debt capital (loans) will get more
expensive and harder to acquire.
13- 17
13.39 A finance manger likes EVA because it indicates the enhancement of a project to
the monetary worth of the corporation. Engineering managers like CFAT because it
indicates actual cash flow of the project.
13.40 A spreadsheet solution is presented. The AW values are the same. Note the
difference in the patterns of the CFAT and EVA series. CFAT shows a big cost in
year 0 and positive cash flows thereafter. EVA shows nothing in year 0 and after 2
years the value-added terms turn positive, indicating a positive contribution to the
corporations worth.
The Japan supplier indicates a larger AW of EVA, however, the difference is small
given the size of the order.
13- 18
13.42 (a) Only the US requires MACRS for tax depreciation. Most others allow some
versions of classical methods, other accelerated methods, and switching
between methods.
(b) Tax rates are reduced to encourage foreign investment, expand trading
relations with other countries, to become a member of international trading
packs, such as NAFTA and the EU, etc.
(c) In general, corporate tax rates average between 20% and 40% of TI. Only
countries like Japan and US have high rates around 40%. Worldwide, rates
have decreased in the last 10 to 15 years.
(d) Most countries use some version of statutory class lives to define allowable
Recovery periods.
13.43 Internationally, corporate and individual tax rates vary widely. Depending upon the
country, the rates may not compare at all with Tables 13-1 and 13-2 rates. The
lowest and highest rates are the ones that may compare the closest.
Problems for Test Review and FE Exam Practice
13.44 Answer is (c)
13.45 Taxes = (55,000 + 4,000 12,000)(0.25) = $11,750
Answer is (a)
13.46
CFAT = GI E TI(Te)
26,000 = 30,000 TI(0.40)
TI = (30,000 26,000)/0.40 = $10,000
Taxes = TI(Te) = 10,000(0.40) = $4000
TI = (GI - E D)
10,000 = (30,000 D)
D = $20,000
Answer is (d)
13- 19
13- 20