FINANCE 502 CHAPTER 8
Capital Budgeting Cash Flows
Solutions to End-of-Chapter Problems
8-5 LG 3: Sunk Costs and Opportunity Costs
a. Sunk cost - The funds for the tooling had already been expended and would not change, no matter whether the new technology would be acquired or not.
b. Opportunity cost - The development of the computer programs can be done without additional expenditures on the computers; however, the loss of the cash inflow from the leasing arrangement would be a lost opportunity to the firm.
c. Opportunity cost - Covol will not have to spend any funds for floor space but the lost cash inflow from the rent would be a cost to the firm.
d. Sunk cost - The money for the storage facility has already been spent, and no matter what decision the company makes there is no incremental cash flow generated or lost from the storage building.
e. Opportunity cost - Foregoing the sale of the crane costs the firm $180,000 of potential cash inflows.
8-6 LG 4: Book Value
Installed Accumulated Book
Asset Cost Depreciation Value
A $ 950,000 $ 674,500 $275,500
B 40,000 13,200 26,800
C 96,000 79,680 16,320
D 350,000 70,000 280,000
E 1,500,000 1,170,000 330,000
8-7 LG 4: Book Value and Taxes on Sale of Assets
a. Book value = $80,000 - (.71 x $80,000)
= $23,200
b. Capital Tax on Depreciation Tax on Total
Sale price gain capital gain recovery recovery tax
$100,000 $20,000 $8,000 $56,800 $22,720 $30,720
56,000 -0- -0- 32,800 13,120 13,120
23,200 -0- -0- -0- -0- -0-
15,000 -0- -0- (8,200) (3,280) (3,280)
Finance 502 Instructor: White
8-11 Initial Investment—Basic Calculation
Depreciation Schedule For Old Asset:
Existing Machine
Depreciable Basis
$20,000
MACRS
Depreciation
Book
Year
%
Expense
Value
1
20%
$4,000
$16,000
2
32%
$6,400
$9,600
3
19%
$3,800
$5,800
4
12%
$2,400
$3,400
5
12%
$2,400
$1,000
6
5%
$1,000
$0
Installed Cost of New Assets
(35,000 + 5,000)
($40,000)
Net Proceeds from Sale of Existing...