стр. 117 |

2. The project should be undertaken if the criterion is a 2-year payback.

19x1 $ 510,000

19x2 ˜,OOo

$1,110,000

Payback is in 2 years, which is greater than cost of $l,O80,OOO.

The payback period is:

(510/510) + (570/600) = 1.95 years

19x1 income $ 13,500

3.

19x2 income 232,500

19x3 income 106,500

$352,500

Average income: $117,500 ($352,50013)

Accounting rate of return: $117,500/$1,080,000 = 10.88%

4. The project should be adopted if a 20 percent after-tax rate of return is required.

Present Value of Cash Flows at 20%

19x1 0.83 X 510,000 = $ 423,300

19x2 0.69 X 600,000 = 414,000

19x3 0.58 X 480,000 = 278,400

Present Value $1,115,700

The present value of $1,115,700 is greater than the initial outlay of $1,080,000; therefore, the

project more than satisfies the 20 percent requirement.

Income T x Factors. R. Jack and J. Jill have formed a corporation to franchise a quick food system

a

83

.2

for shopping malls. They have just completed experiments with a prototype machine which will

serve as the basis of the operation. Because the system is new and untried, they have decided to

conduct a pilot operation in a nearby mall. When it proves successful, they will aggressively

market the franchises.

The incdme statements below represent Jack and JillвЂ™s best estimates of income from the mall

operation for the next 4 years. At the end of the 4-year period they intend to sell the operation

and concentrate on the sale of and supervision of franchises. Based upon the income stream

projected, they believe the operation can be sold for $19O,O00; the income tax liability from the

sale will be $40,000.

1. Calculate the cash flow for the mall operation for the 4-year period beginning January 1,

19x6,ignoring tax implications.

2. Adjust the cash flows for tax consequences as appropriate.

[CHAP. 8

CAPITAL BUDGETING (INCLUDING LEASING)

248

SOLUTION

19x9

19x7

19x6

1.

Recurring cash flows:

$230,000

$150,000

$120,000

Sales

Less: Cash expenditures

$1 10,000

$60,000 $ 75,000

Cost of goods sold

44,000

30,000

24,000

Wages

3,200

2,300

2,000

Supplies

1,800

1,200

1,000

Personal property taxes

12,000

12,000

12,000

Annual rental charges

$171,000

$120,500

$ 99,000

Total cash expenditures

Total recurring cash

$ 59,000

$ 29,500

$ 21,000

flows before taxes

Nonrecurring cash flows:

Cash flows at inception:

$ (36,000)

Rental charges

(130,000)

Purchase of new machine

Cash flows at conclusion of mall

operation:

$190,o00

0

0

Sale of mall operation

$190,000

0

0

$( 166,000)

Total nonrecurring cash flows

$249,000

$ 29,500 $ 4,

4m

$( 145,000)

Total cash flows before taxes

Calculation of Income Taxes

2.

19x9

19x8

19x7

19x6

Income from operations:

Net income (loss) before taxes as

$ 28,000

$13,000

$(1,5W

$ (10,000)

stated

Add: Amount for straight-line

11,Ooo

11,000

11,Ooo

11,000

depreciation

Deduct: Amount of S-Y-D

(16,000) (14,000)

(20,000) (18,000)

depreciation*

Taxable income (loss) before

$ 25,000

$ 8,000

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