Chapter 7

Problems 1-30

Input boxes in tan

Output boxes in yellow
Given data in blue
Calculations in red
Answers in green

NOTE: Some functions used in these spreadsheets may require that

the "Analysis ToolPak" or "Solver Add-in" be installed in Excel.
To install these, click on "Tools|Add-Ins" and select "Analysis ToolPak"
and "Solver Add-In."
sis ToolPak"
 Chapter 7
Question 1

Input area:

Initial cost $ 604,000

Project life 8
Units sales 55,000
Price/unit $ 36.00
Variable cost/unit $ 17.00
Fixed costs $ 685,000
Tax rate 21%
Required return 15%
b. New quantity for calculation 56,000
Projected sales change (500)
c. New VC for calculation $ 18.00
Projected VC change $ (1.00)

Output area:

a. Depreciation per year $ 75,500

Accounting break-even 40,026

b. Base OCF $ 300,255

Base NPV $ 743,340.72
New quantity 56,000
OCF $ 315,265
NPV $ 810,695.42
DNPV/DQ $ 67.355
For a sales change of (500)
the NPV would change $ (33,677.35)

c. New variable cost $ 18.00

OCF $ 256,805
DOCF/DVC $ (43,450.00)
If variable costs change by $ (1.00)
then OCF would change by $ 43,450.00
Chapter 7
Question 2

Input area:

Initial cost $ 604,000

Project life 8
Units sales 55,000
Price/unit $ 36.00
Variable cost/unit $ 17.00
Fixed costs $ 685,000
Tax rate 21%
Required return 15%
Price uncertainty 10%
Quantity uncertainty 10%
Variable cost uncertainty 10%
Fixed cost uncertainty 10%

Output area:

Annual depreciation $75,500

Scenario Unit sales Unit price Unit variable cost Fixed costs
Base case 55,000 $ 36.00 $ 17.00 $ 685,000
Best case 60,500 $ 39.60 $ 15.30 $ 616,500
Worst case 49,500 $ 32.40 $ 18.70 $ 753,500

Best-case OCF $ 690,238.50

Best-case NPV $ 2,493,322.07

Worst-case OCF $ (43,671.50)

Worst-case NPV $ (799,968.06)
 Chapter 7
Question 3

Input area:

Accounting break-even Unit price Unit variable cost Fixed costs Depreciation
a. 95,800 $ 42 $ 30 $ 820,000 ?
b. 143,806 ? 64 2,750,000 $ 1,150,000
c. 7,835 97 ? 245,000 105,000

Output area:

a. Depreciation $ 329,600

b. Unit price $ 91.12

c. Unit variable cost $ 52.33

Chapter 7
Question 4

Input area:

Machine cost $ 435,000

Life of machine 5
Price per unit $ 16
Variable cost per unit $ 5
Fixed costs $ 295,000
Tax rate 24%
Discount rate 12%

Output area:

EAC $ 120,673.23

Financial break-even 38,755.17

Chapter 7
Question 5

Input Area:

New machine cash flow $ 435,000

Price $ 2,800,000
Pirce decline/year $ 215,000
Lowest price $ 2,155,000
Technology life 10
Required return 9%

Output Area:

Purchase in year: Equipment NPV

0 $ 2,800,000 $ (8,318.90)
1 $ 2,585,000 $ 21,038.90
2 $ 2,370,000 $ 31,686.15
3 $ 2,155,000 $ 26,512.52
4 $ 2,155,000 $ (144,253.38)
5 $ 2,155,000 $ (300,919.34)
6 $ 2,155,000 $ (444,649.58)

You should purchase when the NPV is the

highest, which is $ 31,686.15
when purchased in Year 2
Chapter 7
Question 6

Input area:

Go to market now:
Payoff if successful $ 24,000,000
Payoff if not successful $ 8,500,000
Probability of success 50%
Probability of failure 50%

Test market first:

Cost of test marketing $ 1,200,000
Probability of success 80%
Probability of failure 20%

Discount rate 11%

Output area:

NPV of going to market now $ 16,250,000.00

NPV of test marketing $ 17,628,828.83

The company should test market first

since this option has the highest NPV.
Chapter 7
Question 7

Input area:

Go to market now:
Probability of success 50%

Focus group:
Cost $ 155,000
Probability of success 65%

Consulting firm:
Cost $ 345,000
Probability of success 80%

NPV if successful $ 1,900,000

NVP if unsuccessful $ -

Output area:

NPV of going to market now $ 950,000.00

NPV of focus group $ 1,080,000.00

NPV of consulting firm $ 1,175,000.00

:
The company should use the consulting firm
since this option has the highest NPV.
Chapter 7
Question 8

Input area:

Go to market now:
Probability of success 55%

Market research:
Cost $ 875,000
Probability of success 70%

NPV if successful $ 16,500,000

NVP if unsuccessful $ 7,500,000
Disocount rate 13%

Output area:

NPV of going to market now $ 12,450,000.00

NPV of market research $ 11,337,389.38

The company should go directly to market

since this option has the highest NPV.
Chapter 7
Question 9

Input area:

Sales price $ 43.00

Variable costs $ 10.45
Fixed costs $ 435,000
Depreciation $ 130,000
Tax rate 21%
Discount rate 15%
Initial investment $ 910,000
Life of project 7

Output area:

Accounting break-even 17,357.91

EAC $ 218,727.93

Financial break-even 20,808.41

Chapter 7
Question 10

Input area:

Life of project 5
Initial investment $ 530,000
Sales price $ 75.00
Variable costs $ 27.00
Fixed costs $ 235,000
Tax rate 21%
Discount rate 8%

Output area:

Depreciation $ 106,000.00
EAC $ 132,741.92

Financial break-even 7,809.39

 Chapter 7
Question 11

Output area:

a. IRR = 0% payback = N years NPV = I[(I/N)(PVIFAR%,N) - 1]

b. IRR = R% payback < N years NPV = 0

Chapter 7
Question 12

Input area:

Initial fixed assets $ 485,000

Life of project 4
Price $ 41
Variable costs $ 24
Fixed costs $ 189,000
Quantity sold 90,000
Tax rate 23%
Change in quantity 1,000

Output area:

OCF at 90,000 units $ 1,060,457.50

OCF at 91,000 units $ 1,073,547.50

DOCF/DQ $ 13.09
 Chapter 7
Question 13

Input area:

Initial cost $ 720,000

Life 4
Unit sales 380
Price/unit $ 17,400
Variable cost/unit $ 14,100
Fixed costs $ 680,000
Required return 15%
Tax rate 21%
a. Unit sales uncertainty 10%
Variable cost uncertainty 10%
Fixed cost uncertainty 10%
b. New fixed costs $ 690,000

Output area:

Upper bound Lower bound

a. Unit sales 418 342
Variable cost/unit $ 15,510 $ 12,690
Fixed costs $ 748,000 $ 612,000

Depreciation $ 180,000

Base case OCF $ 491,260.00

Base case NPV $ 682,536.67

Best case OCF $ 1,109,656.20

Best case OCF $ 2,448,044.44

Worst case OCF $ (42,479.80)

Worst case NPV $ (841,278.91)

b. OCF with fixed costs = $ 690,000.00

 OCF $ 483,360.00
NPV $ 659,982.34
DNPV/DFC $ (2.255)
For every dollar FC increase, NPV changes by: $ (2.255)

c. Accounting break-even 260.61

Chapter 7
Question 14

Input area:

Price per unit $ 950

Variable cost per unit $ 415
Marketing study $ 150,000
Unit sales 50,000
High price units lost 9,000
High price club's price $ 1,450
High price club's VC $ 590
Cheap club units gained 12,000
Cheap club's price $ 475
Cheap club's VC $ 210
Fixed costs $ 9,400,000
R&D $ 1,000,000
Project cost $ 29,400,000
Project life 7
Net working capital $ 2,400,000
Tax rate 24%
Cost of capital 14%

Output area:

Initial cash outlay

Plant & Equipment $ (29,400,000)
NWC (2,400,000)
Total $ (31,800,000)

New club sales $ 47,500,000

High-priced sales lost (13,050,000)
Cheap sales gained 5,700,000
Total sales $ 40,150,000

New club VC $ (20,750,000)

High-priced VC saved 5,310,000
Cheap club VC (2,520,000)
Total VC $ (17,960,000)

Total Sales $ 40,150,000

Total VC 17,960,000
Fixed costs 9,400,000
Depreciation 4,200,000
EBIT $ 8,590,000
Taxes 2,061,600
Net income $ 6,528,400

OCF $ 10,728,400

Cash flows
t Cash Flow
0 $ (31,800,000)
1 10,728,400
2 10,728,400
3 10,728,400
4 10,728,400
5 10,728,400
6 10,728,400
7 13,128,400

Payback period 2.964

NPV $15,165,779.21
IRR 28.18%
Chapter 7
Question 15

Input area:

Project cost $ 29,400,000

Porject life $ 7
Unit sales 50,000
Price per unit $ 950
Variable cost per unit $ 415
Fixed costs $ 9,400,000
Lost high price units lost 9,000
High price club's price $ 1,450
High price club's VC $ 590
Cheap club units gained 12,000
Cheap club's price $ 475
Cheap club's VC $ 210
Marketing study $ 150,000 Sunk cost
R&D $ 1,000,000 Sunk cost
Net working capital $ 2,400,000
Tax rate 24%
Cost of capital 14%
Uncertainty 10%

Output area:

Best case Worst Case

Unit sales (new clubs) 55,000 45,000
Price (new clubs) $ 1,045 $ 855
VC (new clubs) $ 374 $ 457
Fixed cost $ 8,460,000 $ 10,340,000
Sales lost (high-priced) 8,100 9,900
Sales gained (cheap) 13,200 10,800

Initial cash outlay

Plant & Equipment $ (29,400,000)
NWC $ (2,400,000)
Total $ (31,800,000)

Best case Worst Case

New club sales $ 57,475,000 $ 38,475,000
High-priced sales lost (11,745,000) (14,355,000)
Cheap sales gained 6,270,000 5,130,000
Total sales $ 52,000,000 $ 29,250,000

New club VC $ (20,542,500) $ (20,542,500)

High-priced VC saved 4,779,000 5,841,000
Cheap club VC (2,772,000) (2,268,000)
Total VC $ (18,535,500) $ (16,969,500)

Total Sales $ 52,000,000 $ 29,250,000

Total VC 18,535,500 16,969,500
Fixed costs 8,460,000 10,340,000
Depreciation 4,200,000 4,200,000
EBIT $ 20,804,500 $ (2,259,500)
Taxes 4,993,080 (542,280)
Net income $ 15,811,420 $ (1,717,220)

OCF $ 20,011,420 $ 2,482,780

Cash flows
t Cash Flow Cash Flow
0 $ (31,800,000) $ (31,800,000)
1 20,011,420 2,482,780
2 20,011,420 2,482,780
3 20,011,420 2,482,780
4 20,011,420 2,482,780
5 20,011,420 2,482,780
6 20,011,420 2,482,780
 7 22,411,420 4,882,780

NPV $54,974,198.80 ($20,193,952.94)

Chapter 7
Question 16

Input area:

Project cost $ 29,400,000

Unit sales 50,000
Price per unit $ 950
Variable cost per unit $ 415
Fixed costs $ 9,400,000
Lost high price units lost 9,000
High price club's price $ 1,450
High price club's VC $ 590
Cheap club units gained 12,000
Cheap club's price $ 475
Cheap club's VC $ 210
Marketing study $ 150,000 Sunk cost
R&D $ 1,000,000 Sunk cost
Net working capital $ 2,400,000
Tax rate 24%
Cost of capital 14%
New price $ 960
New quantity 51,000

Output area:

Initial cash outlay

Plant & Equipment $ (29,400,000)
NWC $ (2,400,000)
Total $ (31,800,000)

DPrice DQuantity
New club sales $ 48,000,000 $ 48,450,000
High-priced sales lost (13,050,000) (13,050,000)
Cheap sales gained 5,700,000 5,700,000
Total sales $ 40,650,000 $ 41,100,000

New club VC $ (20,750,000) $ (21,165,000)

High-priced VC saved 5,310,000 5,310,000
Cheap club VC (2,520,000) (2,520,000)
Total VC $ (17,960,000) $ (18,375,000)

Total Sales $ 40,650,000 $ 41,100,000

Total VC 17,960,000 18,375,000
Fixed costs 9,400,000 9,400,000
Depreciation 4,200,000 4,200,000
EBIT $ 9,090,000 $ 9,125,000
Taxes 2,181,600 2,190,000
Net income $ 6,908,400 $ 6,935,000

OCF $ 11,108,400 $ 11,135,000

Cash flows
t Cash Flow Cash Flow
0 $ (31,800,000) $ (31,800,000)
1 11,108,400 11,135,000
2 11,108,400 11,135,000
3 11,108,400 11,135,000
4 11,108,400 11,135,000
5 11,108,400 11,135,000
6 11,108,400 11,135,000
7 13,508,400 13,535,000

NPV $ 16,795,335.05 $ 16,909,403.96

DNPV/DP $162,955.58
DNPV/DQ $ 1,743.62
 Chapter 7
Question 17

Input Area:

Units sold per year 6,500

Net cash flow per unit $ 43
Annual operating cash flow $ 279,500
Initial investment $ 980,000
Life time 10
Discount rate 16%
Abandonment value $ 810,000

Output Area:

a. NPV $ 370,887.08

b. Q 4,089
Abandon the project if Q < 4,089
because NPV(abandonment) >
NPV(project CF's)

c. The abandonment value is the market value of

the project. If you continue with the project in
one year, you forego this cash that could
have been used for something else.
 Chapter 7
Question 18

Input Area:

Units per year if successful 9,100

Units per year if unsuccessful 3,700
Net cash flow per unit $ 43
Successful operating cash flow $ 391,300
Initial operating cash flow $ 279,500
Initial investment $ 980,000
Life time 10
Discount rate 16%
Abandonment value $ 810,000

Output Area:

a. Success:
PV future CF's $1,802,540.62

b. Failure: (Calculation assumes that if the

project is unsuccessful it will be abandoned.)
From #17, Q < 4,089
so you will abandon, PV = $ 810,000
Year 1 expected value $ 1,585,770.31
NPV $ 387,043.37

No abandonment, PV future CF's $ 732,901.13

Gain from option to abandonment $ 77,098.87
Option is 50% likely to occur:
Value = $ 33,232.27
Chapter 7
Question 19

Input Area:

Units per year if successful 9,100

Units per year if unsuccessful 3,700
Net cash flow per unit $ 43
Annual operating cash flow $ 391,300
Initial operating cash flow $ 279,500
Initial investment $ 980,000
Life time 10
Discount rate 16%
Abandonment value $ 810,000
Projected sales after expansion 18,200

Output Area:

Success: PV future CF's $3,605,081.24

Failure: (Calculation assumes that if the
project is unsuccessful it will be abandoned.)
From #17, Q < 4,089
abandon the project, PV = $ 810,000
Year 1 expected value $ 2,487,040.62
NPV $ 1,164,000.53
Gain from option to expand, PV future CF's $ 1,802,540.62
Option is 50% likely to happen $ 901,270.31
Present value of option CF's $ 776,957.16
 Chapter 7
Question 20

Input area:

Cost of press $ 7,200

Variable costs $ 3.20
Sales price $ 15.00
Tax rate 21%

b. License fee $ 20,000

Life of project 3
Depreciation $ -
Discount rate 12%

Output area:

a. Accounting break-even 610.17

EAC $ 8,326.98

b. Financial break-even 893.26

Chapter 7
Question 21

Input area:

Cash offered today $ 25,000

Percentage of profits offered 1.25%

Probability script is bad

and is not made into a movie 90%
Probability a movie is made
and the movie is bad 60%

Profit if movie is good $ 45,000,000

Output area:

Value if movie is good and there is a big audience

Value if movie is good, there is a big audience, and the script is good

Percentage of profits if movie is good, there is a big audience, and the script is good

10%
Script is good
Read script
Script is bad
90%

The screenwriter should take the cash upfront.

 $ 18,000,000

cript is good $ 1,800,000

ence, and the script is good $ 22,500

Big audience
40% $ 45,000,000
Movie is good
Make movie
Movie is bad
60% Small audience
No profit
Don't make movie
No profit
Chapter 7
Question 22

Input area:

Gold left in mine (ounces) 33,600

Ounces mined per year 4,200
Required return 12%
Opening costs $ 17,400,000
Contract price today $ 900
Probability of price increase 60%
Price increase $ 1,150
Probability of price decrease 40%
Price decrease $ 700

Output area:

Life of mine (years) 8

CF from opening today $ 3,780,000.00

NPV if opened today $ 1,377,678.32

Price increase CF $ 4,830,000

Price decrease CF $ 2,940,000

Value in one year:

Price increase CF $ 23,993,700.07
Price decrease CF $ 14,604,860.91
NPV in one year for waiting $ 2,838,164.41

NPV today for waiting $ 2,534,075.37

Option value $ 1,156,397.05

 Chapter 7
Question 23

Input area:

Annual OCF $ 8,700,000

Project life 10
Discount rate 13%
Initial investment $ 43,000,000
Aftertax salvage value in Year 1 $ 28,000,000

Output area:

a. NPV $ 4,208,318.24

b. Minimum cash flow $ 5,456,329.25

 Chapter 7
Question 24

Input area:

Units sold per year 20

Cash flow per unit $ 235,000
Life of project 5
Machine $ 17,600,000
Discount rate 11%

b. In one year:
Aftertax salvage value $ 10,400,000
New units sold 30
Probability of increased sales 50%

Output area:

a. Cash flow per year $ 4,700,000.00

NPV $ (229,284.02)

b. New cash flow per year $ 7,050,000.00

Value of expansion CF today $ 9,852,361.31

Value of abandonment today $ 4,684,684.68

Value of 1st year sales today $ 4,234,234.23

New NPV $ 1,171,280.23

Chapter 7
Question 25

Input area:

Life of project 6
Required return 13%
Tax rate 21%

Pessimistic Expected
Market size 110,000 120,000
Market share 20% 23%
Selling price $ 139 $ 143
Variable costs per year $ 77 $ 73
Fixed costs per year $ 975,000 $ 920,000
Initial investment $ 2,300,000 $ 2,150,000

Output area:

Pessimistic Expected
Units per year 22,000 27,600

Revenue $ 3,058,000.00 $ 3,946,800.00

Variable costs 1,694,000.00 2,014,800.00
Fixed costs 975,000.00 920,000.00
Depreciation 383,333.33 358,333.33
EBT $ 5,666.67 $ 653,666.67
Tax 1,190.00 137,270.00
Net income $ 4,476.67 $ 516,396.67
OCF $ 387,810.00 $ 874,730.00

NPV $ (749,710.22) $ 1,346,776.73

 Optimistic
132,000
25%
$ 147
$ 70
$ 890,000
$ 1,950,000

Optimistic
33,000

$ 4,851,000.00
2,310,000.00
890,000.00
325,000.00
$ 1,326,000.00
278,460.00
$ 1,047,540.00
$ 1,372,540.00

$ 3,536,796.99
 Chapter 7
Question 26

Input area:

Quantity 26,000
Initial investment $ 2,900,000
Project life 5
Fixed costs $ 345,000
Variable costs $ 295
Salvage value $ 275,000
Selling price $ 375
Net working capital $ 500,000
Required return 13%
Tax rate 24%
b. Initial cost uncertainty 15%
Salvage value uncertainty 15%
Price uncertainty 10%
NWC uncertainty 5%

Output area:

a. Depreciation $ 580,000
Aftertax salvage value $ 209,000
OCF $ 1,457,800.00
NPV $ 2,112,236.53

b. Best case Worst case

Initial cost $ 2,465,000 $ 3,335,000
Salvage value $ 316,250 $ 233,750
Price $ 413 $ 338
NWC $ 475,000 $ 525,000
Aftertax salvage value $ 240,350 $ 177,650

Best case OCF $ 2,177,920

Best case NPV $ 5,108,511.63

Worst case OCF $ 737,680

Worst case NPV $ (884,038.57)
Chapter 7
Question 27

Input area:

Quantity 26,000
Initial investment $ 2,900,000
Project life 5
Fixed costs $ 345,000
Variable costs $ 295
Salvage value $ 275,000
Selling price $ 375
Net working capital $ 500,000
Required return 13%
Tax rate 24%
New quantity 27,000

Output area:

Depreciation $ 580,000
Aftertax salvage value $ 209,000

Units sold 26,000

OCF $ 1,457,800
NPV $ 2,112,236.53

Units sold 27,000

OCF $ 1,518,600
NPV $ 2,326,084.19

DOCF/DQ $ 60.80
DNPV/DQ $ 213.85

You wouldn't want Q to fall below the point where

NPV = 0.
DQ 9,877
Minimum Q 16,123
Chapter 7
Question 28

Input Area:

# of years 4
Initial investment $ 18,000,000
Net working capital $ 950,000
Pre-tax revenue $ 12,400,000
Pre-tax operating costs $ 4,500,000
Tax rate 21%
Discount rate 13%
Salvage value
Year 1 $ 15,000,000
Year 2 $ 11,000,000
Year 3 $ 8,500,000
Year 4 $ -

Output Area:

Assuming the project lasts four years, the NPV is calculated as follows:
Year 0 1 2
Sales $ 12,400,000 $ 12,400,000
Operating costs 4,500,000 4,500,000
Depreciation 4,500,000 4,500,000
EBT $ 3,400,000 $ 3,400,000
Tax 714,000 714,000
Net income $ 2,686,000 $ 2,686,000
+Depreciation 4,500,000 4,500,000
Operating CF $ 7,186,000 $ 7,186,000

Change in NWC $ (950,000) 0 0

Capital spending (18,000,000) 0 0
Total cash flow $ (18,950,000) $ 7,186,000 $ 7,186,000

Net present value $ 3,007,203.74

Abandoned after one year:

Book value $ 13,500,000
Taxes $ (315,000)
Aftertax salvage value $ 14,685,000

Year 0 1
Sales $ 12,400,000
Operating costs 4,500,000
Depreciation 4,500,000
EBT $ 3,400,000
Tax 714,000
Net income $ 2,686,000
+Depreciation 4,500,000
Operating CF $ 7,186,000

Change in NWC $ (950,000) $ 950,000

Capital spending (18,000,000) 14,685,000
Total cash flow $ (18,950,000) $ 22,821,000

Net present value $ 1,245,575.22

Abandoned after two years:

Book value $ 9,000,000
Taxes $ (420,000)
Aftertax salvage value $ 10,580,000

Year 0 1 2
Sales $ 12,400,000 $ 12,400,000
Operating costs 4,500,000 4,500,000
Depreciation 4,500,000 4,500,000
EBT $ 3,400,000 $ 3,400,000
Tax 714,000 714,000
Net income $ 2,686,000 $ 2,686,000
+Depreciation 4,500,000 4,500,000
Operating CF $ 7,186,000 $ 7,186,000

Change in NWC $ (950,000) 0 950,000

Capital spending (18,000,000) - 10,580,000
Total cash flow $ (18,950,000) $ 7,186,000 $ 18,716,000

Net present value $ 2,066,665.36

Abandoned after three years:
Book value $ 4,500,000
Taxes $ (840,000)
Aftertax salvage value $ 7,660,000

Year 0 1 2
Sales $ 12,400,000 $ 12,400,000
Operating costs 4,500,000 4,500,000
Depreciation 4,500,000 4,500,000
EBT $ 3,400,000 $ 3,400,000
Tax 714,000 714,000
Net income $ 2,686,000 $ 2,686,000
+Depreciation 4,500,000 4,500,000
Operating CF $ 7,186,000 $ 7,186,000

Change in NWC $ (950,000) 0 0

Capital spending (18,000,000) 0 0
Total cash flow $ (18,950,000) $ 7,186,000 $ 7,186,000

Net present value $ 3,984,404.47

 3 4
$ 12,400,000 $ 12,400,000
4,500,000 4,500,000
4,500,000 4,500,000
$ 3,400,000 $ 3,400,000
714,000 714,000
$ 2,686,000 $ 2,686,000
4,500,000 4,500,000
$ 7,186,000 $ 7,186,000

0 $ 950,000
0 0
$ 7,186,000 $ 8,136,000
 3
$ 12,400,000
4,500,000
4,500,000
$ 3,400,000
714,000
$ 2,686,000
4,500,000
$ 7,186,000

950,000
7,660,000
$ 15,796,000
 Chapter 7
Question 29

Input area:

Initial investment $ 9,500,000

Cash flow per year $ 1,800,000
Life of project 10
Discount rate 10%

b. In one year:
Upward sales revision $ 2,950,000
Downward sales revision $ 395,000
Aftertax salvage value $ 3,100,000
Probability of increased sales 50%

Output area:

a. NPV $ 1,560,220.79

b. PV of downward revision CF $ 2,274,814.41

Maximum value of downward

sales revision or abandonment $ 3,100,000.00

If the sales are revised downward, the company would

abandon the project
since the present value of the cash flows from this
option are greater.

Value of downward revision $ 3,100,000.00

PV of year 1 expected cash flow $ 1,636,363.64

Expected value today of downward
revision $ 1,409,090.91
PV of upward revision $ 7,722,327.39

Revised NPV $ 1,267,781.94

Chapter 7
Question 30

Input area:

Saved pretax operating expense $ 13,000

Life of project 10
Age of old harvester 5
Purchase price of old harvester $ 65,000
Salvage value of old harvester $ 21,000
Tax rate 22%
Required return 15%

Output area:

Depreciation (old) $ 4,333.33

Book value (old) $ 43,333.33
Aftertax salvage value (old) $ 25,913.33
Aftertax PV of savings $ 50,890.31

Purchase price $ 80,957.88