Mini Case Chapter 8
Present value cost of owning the equipment
The depreciation schedule is as shown below: The depreciable basis is = .
From the table above calculated in excel, depreciation is considered a tax-deductible expense, and therefore it leads to tax savings that can be calculated as i.e., for year one, .Moreover, maintenance expense is tax deductible as well and so after-tax value is calculated as . The ending book value is , so taxes must be paid on the full salvage value.
Delegate your assignment to our experts and they will do the rest.
Therefore, the PV cost of owning at a discount rate of 6% is
Present value cost of leasing the equipment
If the equipment was leased, its only cashflows would be the after-tax lease payments
If Lewis leased the equipment, its only cash flows would be the after-tax lease payments:
Each lease payment is , it is tax deductible and therefore once the tax is factored in through the formula
Therefore, PV cost of leasing at 6% is
The net advantage to leasing
The net advantage to leasing (NAL) is
The NAL is positive which means that the PV cost of owning is greater and therefore the preferable way would be leasing the equipment.
With the changes, the NAL becomes
The changes make the leasing less attractive as the NAL is negative.
Mini Case Chapter 11
Franchise’s payback period, net present value (NPV), internal rate of return (IRR) and modified internal rate of return (MIRR).
Left is for Franchise S. and right for Franchise L.
Graph the NPV of each Franchise at different values of corporate cost of capital
The net present value of Franchise L is more sensitive to changes in the corporate cost of capital than Franchise S. The NPV’s have different sensitivities to the cost of capital because the cash flows from Franchise S are received faster than Franchise L. Both Franchises intersect at 10%.
The NPV method of capital budgeting states that all independent projects that have positive NPV should be accepted. The reason being that projects add wealth, and should be the overall goal of the manager in all respects. In this case, since we are using the NPV method to evaluate two mutually exclusive projects, we accept the project that has a higher NPV. Considering the two projects above, we accept project S.
The optimal economic life of Franchise S is two years and for Franchise L is three years. This is shown on the excel worksheet.
Mini Case Chapter 13
Computron as compared to industry has a higher proportion of inventory and current assets. It has a little more equity than industry as well as more short-term debt but less long-term debt. Moreover, it has lower salaries and benefits but with higher supplies, insurance and bad debt in comparison to the industry.
Company current ratio and quick ratio improved but are still yet to reach the industry average. Company inventory turnover ratio is declining outstanding days sales increasing above the industry average, this indicates a bad situation. The profit margin for the company is the same as the industry average. There is poor utilization of assets as shown by the company ROA and ROE which are below the industry average.
References
Shrieves, R. E., & Wachowicz Jr, J. M. (2001). Free Cash Flow (FCF), Economic Value Added (EVA™), and Net Present Value (NPV):. A Reconciliation of Variations of Discounted-Cash-Flow (DCF) Valuation. The engineering economist , 46 (1), 33-52.
