Soluation for fund of corporate finance 4th edition

www.elsolucionario.net Solutions to Chapter The Firm and the Financial Manager real executive airplanes brand names financial stock capital budgeting financing A firm might cut its labor force dramatically which could reduce immediate expenses and increase profits in the short term Over the long term, however, the firm might not be able to serve its customers properly or it might alienate its remaining workers; if so, future profits will decrease, and the stock price will decrease in anticipation of these problems Similarly, a firm can boost profits over the short term by using less costly materials even if this reduces the quality of the product Once customers catch on, sales will decrease and profits will fall in the future The stock price will fall The moral of these examples is that, because stock prices reflect present and future profitability, the firm should not necessarily sacrifice future prospects for short-term gains The key advantage of separating ownership and management in a large corporation is that it gives the corporation permanence The corporation continues to exist if managers are replaced or if stockholders sell their ownership interests to other investors The corporation’s permanence is an essential characteristic in allowing corporations to obtain the large amounts of financing required by many business entities A sole proprietorship is easy to set up with a minimum of legal work The business itself is not taxed For tax purposes, the income of the proprietorship is treated as the income of the proprietor The disadvantages of a proprietorship are unlimited liability for the debts of the firm, and difficulty in raising large amounts of capital as the business grows 1-1 www.elsolucionario.net investment www.elsolucionario.net www.elsolucionario.net A partnership has the same tax advantage as the proprietorship The partnership per se does not pay taxes The partnership files a tax return, but all of the partnership income is allocated to the partners and treated as personal income Also, it is fairly easy to set up a partnership Because there can be many partners, a partnership can raise capital more easily than a proprietorship However, like sole proprietors, partners have unlimited liability for the debts of the firm In fact, each partner has unlimited liability for all the business’s debts, not just his or her share 1-2 www.elsolucionario.net Double taxation means that a corporation’s income is taxed first at the corporate tax rate, and then, when the income is distributed to shareholders as dividends, the income is taxed again at the shareholder’s personal tax rate a, c, d a b c d e f g h Agency costs are caused by conflicts of interest between managers and shareholders, the owners of the firm In most large corporations, the principals (i.e., the stockholders) hire the agents (i.e., managers) to act on behalf of the principals in making many of the major decisions affecting the corporation and its owners However, it is unrealistic to believe that the agents’ actions will always be consistent with the objectives that the stockholders would like to achieve Managers may choose not to work hard enough, to over-compensate themselves, to engage in empire building, to over-consume perquisites, and so on A share of stock A personal IOU A trademark A truck Undeveloped land The balance in the firm’s checking account An experienced and hardworking sales force A bank loan agreement financial financial real real real financial real financial Corporations use numerous arrangements in an attempt to ensure that managers’ actions are consistent with stockholders’ objectives Agency costs can be mitigated by ‘carrots,’ linking the manager’s compensation to the success of the firm, or by ‘sticks,’ creating an environment in which poorly performing managers can be removed Capital budgeting decisions Should a new computer be purchased? Should the firm develop a new drug? 1-3 www.elsolucionario.net Corporate organization has the advantage of limited liability It also allows for separation of ownership and management, since shares in the firm can be traded without changing management The corporation also has easier access to capital markets The major disadvantage of corporate organization is the double taxation of income Corporations pay taxes on their income, and that income is taxed again when it is passed through to shareholders in the form of dividends Another disadvantage of corporate organization is the extra time and cost required in order to manage a corporation’s legal affairs These costs arise because the corporation must be chartered and is considered a distinct legal entity Such administrative costs are significant only for small corporations, however www.elsolucionario.net Should the firm shut down an unprofitable factory? www.elsolucionario.net Financing decisions Should the firm borrow money from a bank or sell bonds? Should the firm issue preferred stock or common stock? Should the firm buy or lease a new machine that it is committed to acquiring? 1-4 10 A bank loan is not a ‘real’ asset that can be used to produce goods or services Rather, a bank loan is a claim on cash flows generated by other activities, which makes it a financial asset 11 Investment in research and development creates ‘know-how.’ This knowledge is then used to produce goods and services, which makes it a real asset 12 The responsibilities of the treasurer include the following: supervises cash management, raising capital, and banking relationships The controller’s responsibilities include: supervises accounting, preparation of financial statements, and tax matters The CFO of a large corporation supervises both the treasurer and the controller The CFO is responsible for large-scale corporate planning and financial policy 13 The stock price reflects the value of both current and future dividends the shareholders will receive In contrast, profits reflect performance in the current year only Profit maximizers may try to improve this year’s profits at the expense of future profits But stock price maximizers will take account of the entire stream of cash flows that the firm can generate They are more apt to be forward looking 14 a This action might appear, superficially, to be a grant to former employees and thus not consistent with value maximization However, such ‘benevolent’ actions might enhance the firm’s reputation as a good place to work, might result in greater loyalty on the part of current employees, and might contribute to the firm’s recruiting efforts Therefore, from a broader perspective, the action may be value maximizing b The reduction in dividends to allow increased reinvestment can be consistent with maximization of current market value If the firm has attractive investment opportunities, and wants to save the expenses associated with issuing new shares to the public, then it could make sense to reduce the dividend in order to free up capital for the additional investments c The corporate jet would have to generate benefits in excess of its costs in order to be considered stock-price enhancing Such benefits might include timesavings for executives, and greater convenience and flexibility in travel d Although the drilling appears to be a bad bet, with a low probability of success, the project may be value maximizing if a successful outcome (although unlikely) is potentially sufficiently profitable A one in five chance of success is acceptable if the payoff conditional on finding an oil field is ten times the costs of exploration 1-5 www.elsolucionario.net www.elsolucionario.net 15 a Increased market share can be an inappropriate goal if it requires reducing prices to such an extent that the firm is harmed financially Increasing market share can be part of a well-reasoned strategy, but one should always remember that market share is not a goal in itself The owners of the firm want managers to maximize the value of their investment in the firm b Minimizing costs can also conflict with the goal of value maximization For example, suppose a firm receives a large order for a product The firm should be willing to pay overtime wages and to incur other costs in order to fulfill the order, as long as it can sell the additional product at a price greater than those costs Even though costs per unit of output increase, the firm still comes out ahead if it agrees to fill the order c A policy of underpricing any competitor can lead the firm to sell goods at a price lower than the price that would maximize market value Again, in some situations, this strategy might make sense, but it should not be the ultimate goal of the firm It should be evaluated with respect to its effect on firm value d Expanding profits is a poorly defined goal of the firm The text gives three reasons: (i) There may be a trade-off between accounting profits in one year versus accounting profits in another year For example, writing off a bad investment may reduce this year’s profits but increase profits in future years Which year’s profits should be maximized? (ii) Investing more in the firm can increase profits, even if the increase in profits is insufficient to justify the additional investment In this case the increased investment increases profits, but can reduce shareholder wealth (iii) Profits can be affected by accounting rules, so a decision that increases profits using one set of rules may reduce profits using another 16 The contingency arrangement aligns the interests of the lawyer with those of the client Neither makes any money unless the case is won If a client is unsure about the skill or integrity of the lawyer, this arrangement can make sense First, the lawyer has an incentive to work hard Second, if the lawyer turns out to be incompetent and loses the case, the client will not have to pay a bill Third, the lawyer will not be tempted to accept a very weak case simply to generate bills Fourth, there is no incentive for the lawyer to charge for hours not really worked Once a client is more comfortable with the lawyer, and is less concerned with potential agency problems, a fee-for-service arrangement might make more sense 17 The national chain has a great incentive to impose quality control on all of its outlets If one store serves its customers poorly, that can result in lost future sales The reputation of each restaurant in the chain depends on the quality in all the other stores In contrast, 1-6 www.elsolucionario.net www.elsolucionario.net www.elsolucionario.net if Joe’s serves mostly passing travelers who are unlikely to show up again, unsatisfied customers pose a far lower cost They are unlikely to be seen again anyway, so reputation is not a valuable asset www.elsolucionario.net The important distinction is not that Joe has one outlet while the national chain has many Instead, it is the likelihood of repeat relations with customers and the value of reputation If Joe’s were located in the center of town instead of on the highway, one would expect his clientele to be repeat customers from town He would then have the same incentive to establish a good reputation as the chain 1-7 18 While a compensation plan that depends solely on the firm’s performance would serve to motivate managers to work hard, it would also burden them with considerable personal risk tied to the fortunes of the firm This would be unattractive to managers and might cause them to value their compensation packages less highly; it might also elicit excessive caution when evaluating business opportunities 19 Takeover defenses make it harder for underperforming managers to be removed by dissatisfied shareholders, or by firms that might attempt to acquire the firm By protecting such managers, these provisions exacerbate agency problems 20 Traders can earn huge bonuses when their trades are very profitable, but if the trades lose large sums, as in the case of Barings Bank, the trader’s exposure is limited This asymmetry can create an incentive to take big risks with the firm’s (i.e., the shareholders’) money This is an agency problem 21 a A fixed salary means that compensation is (at least in the short run) independent of the firm’s success b A salary linked to profits ties the employee’s compensation to this measure of the success of the firm However, profits are not a wholly reliable way to measure the success of the firm The text points out that profits are subject to differing accounting rules, and reflect only the current year’s situation rather than the longrun prospects of the firm c A salary that is paid partly in the form of the company’s shares means that the manager earns the most when the shareholders’ wealth is maximized This is therefore most likely to align the interests of managers and shareholders 22 Even if a shareholder could monitor and improve managers’ performance, and thereby increase the value of the firm, the payoff would be small, since the ownership share in a large corporation is very small For example, if you own $10,000 of GM stock and can increase the value of the firm by percent, a very ambitious goal, you benefit by only: (0.05  $10,000) = $500 In contrast, a bank that has a multimillion-dollar loan outstanding to the firm has a large stake in making sure that the loan can be repaid It is clearly worthwhile for the bank to spend considerable resources on monitoring the firm 23 Long-term relationships can encourage ethical behavior If you know that you will engage in business with another party on a repeated basis, you will be less likely to take advantage of your business partner if an opportunity to so arises When people say "what goes around comes around," they recognize that the way they deal with their 1-8 www.elsolucionario.net www.elsolucionario.net www.elsolucionario.net www.elsolucionario.net associates will influence the way their associates treat them When relationships are short-lived, however, the temptation to be unfair is greater since there is less reason to fear reprisal, and less opportunity for fair dealing to be reciprocated 1-9 www.elsolucionario.net (This is the yield to maturity on a bond sold with a coupon rate of 6%, face value 939.31, at a price of 1,000.) www.elsolucionario.net Both parties receive a better rate than they would have if they had borrowed directly in their preferred currencies 25-7 www.elsolucionario.net NPV Expected Expected with New Regulations $ (1.100.321,75) $ $ 398.316,01 $ $ (2.278.698,89) $ (2.600.321,75) $ 1.576.693,14 (1.101.683,99) (3.778.698,89) $ $ (1.182.070,85) $ (2.682.070,85) $ 1.494.944,05 $ 76.693,14 Optomistic Optomistic with New Regulations $ 5.859.916,98 $ 4.359.916,98 $ 4.681.539,84 $ 3.181.539,84 (5.055,95) $ 5.778.167,88 $ 4.278.167,88 www.elsolucionario.net Pessimistic Regular Design: Price TZ Cost Overrun (15%) Both Cheap Design: Price TZ Pessimistic with New Regulations www.elsolucionario.net 10.000,00 $ 3.300,00 $ 400.000,00 $ 500.000,00 $ 3,50% 340 10.350,00 $ 150 3.415,50 $ 414.000,00 $ 517.500,00 $ 3,50% 340 10.712,25 $ 150 3.535,04 $ 428.490,00 $ 535.612,50 $ 3,50% 340 11.087,18 $ 150 3.658,77 $ 443.487,15 $ 554.358,94 $ 3,50% 340 11.475,23 $ 150 3.786,83 $ 459.009,20 $ 573.761,50 $ 3,50% 340 11.876,86 $ 150 3.919,36 $ 475.074,52 $ 593.843,15 $ 3,50% 340 12.292,55 $ 150 4.056,54 $ 491.702,13 $ 614.627,66 $ 3,50% 340 12.722,79 150 4.198,52 508.911,71 636.139,63 Expensive Investment: High Price TZ Inflation Rate Tons TZ Price: TZ $ 14.000,00 $ Pounds Zircon Price: Zircon $ 3.300,00 $ Fixed Cost $ 400.000,00 $ Variable Cost $ 500.000,00 $ Revenue: TZ Revenue: Zircon Total Revenue Less Operating Costs: Fixed Variable Depreciation Taxable Income Tax (t = 35%) Net Income + Depreciation - Investment $ Cash Flow PV of Cash Flow Cumulative PV NPV $ 3.519.000,00 $ 3.642.165,00 $ 3.769.640,78 $ 3.901.578,20 $ 4.038.133,44 $ 4.179.468,11 $ 4.325.749,49 Revenue: TZ 512.325,00 530.256,38 548.815,35 568.023,89 587.904,72 608.481,39 629.778,24 Revenue: Zircon $ 4.031.325,00 $ 4.172.421,38 $ 4.318.456,12 $ 4.469.602,09 $ 4.626.038,16 $ 4.787.949,50 $ 4.955.527,73 Total Revenue Less Operating Costs: 414.000,00 428.490,00 443.487,15 459.009,20 475.074,52 491.702,13 508.911,71 Fixed 517.500,00 535.612,50 554.358,94 573.761,50 593.843,15 614.627,66 636.139,63 Variable 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 Depreciation $ 1.671.253,57 $ 1.779.747,45 $ 1.892.038,61 $ 2.008.259,96 $ 2.128.549,06 $ 2.253.048,27 $ 2.381.904,96 Taxable Income 584.938,75 622.911,61 662.213,51 702.890,99 744.992,17 788.566,90 833.666,74 Tax (t = 35%) $ 1.086.314,82 $ 1.156.835,84 $ 1.229.825,09 $ 1.305.368,97 $ 1.383.556,89 $ 1.464.481,38 $ 1.548.238,23 Net Income 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 + Depreciation 10.000.000 - Investment $ $ (10.000.000) $ 2.514.886,25 $ 2.585.407,27 $ 2.658.396,52 $ 2.733.940,40 $ 2.812.128,32 $ 2.893.052,81 $ 2.976.809,65 Cash Flow $ (10.000.000) 2.206.040,57 1.989.386,94 1.794.341,93 1.618.712,19 1.460.531,33 1.318.035,94 1.189.644,24 PV of Cash Flow $ (10.000.000) (7.793.959,43) (5.804.572,49) (4.010.230,56) (2.391.518,37) (930.987,04) 387.048,90 1.576.693,14 Cumulative PV $ 1.576.693,14 NPV Cheaper Investment: Inflation Rate Tons TZ Price: TZ $ Pounds Zircon Price: Zircon $ Fixed Cost $ Variable Cost $ 10.000 $ 3.300 $ 850.000 $ 500.000 $ 3,50% 340 10.350,00 $ 150 3.415,50 $ 879.750,00 $ 517.500,00 $ 3,50% 340 10.712,25 $ 150 3.535,04 $ 910.541,25 $ 535.612,50 $ 3,50% 340 11.087,18 $ 150 3.658,77 $ 942.410,19 $ 554.358,94 $ 3,50% 3,50% 3,50% 3,50% 340 340 340 340 11.475,23 $ 11.876,86 $ 12.292,55 $ 12.722,79 150 150 150 150 3.786,83 $ 3.919,36 $ 4.056,54 $ 4.198,52 975.394,55 $ 1.009.533,36 $ 1.044.867,03 $ 1.081.437,37 573.761,50 $ 593.843,15 $ 614.627,66 $ 636.139,63 Cash Flow PV of Cash Flow Cumulative PV NPV 3,50% 340 15.522,05 $ 150 3.658,77 $ 443.487,15 $ 554.358,94 $ 3,50% 340 16.065,32 $ 150 3.786,83 $ 459.009,20 $ 573.761,50 $ 3,50% 340 16.627,61 $ 150 3.919,36 $ 475.074,52 $ 593.843,15 $ 3,50% 340 17.209,57 $ 150 4.056,54 $ 491.702,13 $ 614.627,66 $ 3,50% 340 17.811,91 150 4.198,52 508.911,71 636.139,63 Expensive Investment: Cheap Price TZ Inflation Rate Tons TZ Price: TZ $ 7.500,00 $ Pounds Zircon Price: Zircon $ 3.300,00 $ Fixed Cost $ 400.000,00 $ Variable Cost $ 500.000,00 $ $ 4.926.600,00 $ 5.099.031,00 $ 5.277.497,09 $ 5.462.209,48 $ 5.653.386,81 $ 5.851.255,35 $ 6.056.049,29 Revenue: TZ 512.325,00 530.256,38 548.815,35 568.023,89 587.904,72 608.481,39 629.778,24 Revenue: Zircon $ 5.438.925,00 $ 5.629.287,38 $ 5.826.312,43 $ 6.030.233,37 $ 6.241.291,54 $ 6.459.736,74 $ 6.685.827,53 Total Revenue Less Operating Costs: 414.000,00 428.490,00 443.487,15 459.009,20 475.074,52 491.702,13 508.911,71 Fixed 517.500,00 535.612,50 554.358,94 573.761,50 593.843,15 614.627,66 636.139,63 Variable 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 Depreciation $ 3.078.853,57 $ 3.236.613,45 $ 3.399.894,92 $ 3.568.891,24 $ 3.743.802,43 $ 3.924.835,52 $ 4.112.204,76 Taxable Income 1.077.598,75 1.132.814,71 1.189.963,22 1.249.111,93 1.310.330,85 1.373.692,43 1.439.271,67 Tax (t = 35%) $ 2.001.254,82 $ 2.103.798,74 $ 2.209.931,70 $ 2.319.779,31 $ 2.433.471,58 $ 2.551.143,09 $ 2.672.933,09 Net Income 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 + Depreciation 10.000.000 - Investment $ $ (10.000.000) $ 3.429.826,25 $ 3.532.370,17 $ 3.638.503,12 $ 3.748.350,73 $ 3.862.043,01 $ 3.979.714,52 $ 4.101.504,52 Cash Flow $ (10.000.000) 3.008.619,52 2.718.044,14 2.455.885,97 2.219.324,54 2.005.824,12 1.813.104,40 1.639.114,29 PV of Cash Flow $ (10.000.000) (6.991.380,48) (4.273.336,34) (1.817.450,37) 401.874,17 2.407.698,29 4.220.802,69 5.859.916,98 Cumulative PV $ 5.859.916,98 NPV $ 3.519.000,00 $ 3.642.165,00 $ 3.769.640,78 $ 3.901.578,20 $ 4.038.133,44 $ 4.179.468,11 $ 4.325.749,49 Revenue: TZ 512.325,00 530.256,38 548.815,35 568.023,89 587.904,72 608.481,39 629.778,24 Revenue: Zircon $ 4.031.325,00 $ 4.172.421,38 $ 4.318.456,12 $ 4.469.602,09 $ 4.626.038,16 $ 4.787.949,50 $ 4.955.527,73 Total Revenue Less Operating Costs: 879.750,00 910.541,25 942.410,19 975.394,55 1.009.533,36 1.044.867,03 1.081.437,37 Fixed 517.500,00 535.612,50 554.358,94 573.761,50 593.843,15 614.627,66 636.139,63 Variable 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 Depreciation $ 1.448.360,71 $ 1.540.553,34 $ 1.635.972,71 $ 1.734.731,75 $ 1.836.947,36 $ 1.942.740,52 $ 2.052.236,44 Taxable Income 506.926,25 539.193,67 572.590,45 607.156,11 642.931,58 679.959,18 718.282,75 Tax (t = 35%) $ 941.434,46 $ 1.001.359,67 $ 1.063.382,26 $ 1.127.575,64 $ 1.194.015,79 $ 1.262.781,34 $ 1.333.953,68 Net Income 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 + Depreciation 8.300.000 - Investment $ $ (8.300.000) $ 2.127.148,75 $ 2.187.073,96 $ 2.249.096,54 $ 2.313.289,92 $ 2.379.730,07 $ 2.448.495,62 $ 2.519.667,97 Cash Flow $ (8.300.000) 1.865.919,96 1.682.882,39 1.518.076,10 1.369.653,34 1.235.957,23 1.115.501,67 1.006.953,36 PV of Cash Flow $ (8.300.000) (6.434.080,04) (4.751.197,65) (3.233.121,55) (1.863.468,21) (627.510,98) 487.990,69 1.494.944,05 Cumulative PV $ 1.494.944,05 NPV 3,50% 340 14.997,15 $ 150 3.535,04 $ 428.490,00 $ 535.612,50 $ Cheaper Investment: High Price TZ Inflation Rate Tons TZ Price: TZ $ 14.000 $ Pounds Zircon Price: Zircon $ 3.300 $ Fixed Cost $ 850.000 $ Variable Cost $ 500.000 $ Revenue: TZ Revenue: Zircon Total Revenue Less Operating Costs: Fixed Variable Depreciation Taxable Income Tax (t = 35%) Net Income + Depreciation - Investment $ 3,50% 340 14.490,00 $ 150 3.415,50 $ 414.000,00 $ 517.500,00 $ 3,50% 340 14.490,00 $ 150 3.415,50 $ 879.750,00 $ 517.500,00 $ 3,50% 340 14.997,15 $ 150 3.535,04 $ 910.541,25 $ 535.612,50 $ 3,50% 340 15.522,05 $ 150 3.658,77 $ 942.410,19 $ 554.358,94 $ 3,50% 3,50% 3,50% 3,50% 340 340 340 340 16.065,32 $ 16.627,61 $ 17.209,57 $ 17.811,91 150 150 150 150 3.786,83 $ 3.919,36 $ 4.056,54 $ 4.198,52 975.394,55 $ 1.009.533,36 $ 1.044.867,03 $ 1.081.437,37 573.761,50 $ 593.843,15 $ 614.627,66 $ 636.139,63 3,50% 340 8.315,38 $ 150 3.658,77 $ 443.487,15 $ 554.358,94 $ 3,50% 340 8.606,42 $ 150 3.786,83 $ 459.009,20 $ 573.761,50 $ 3,50% 340 8.907,65 $ 150 3.919,36 $ 475.074,52 $ 593.843,15 $ 3,50% 340 9.219,41 $ 150 4.056,54 $ 491.702,13 $ 614.627,66 $ 3,50% 340 9.542,09 150 4.198,52 508.911,71 636.139,63 Expensive Investment Expected Price TZ, 15% Cost Overrun: Inflation Rate 3,50% 3,50% Tons TZ 340 340 Price: TZ $ 10.000,00 $ 10.350,00 $ 10.712,25 $ Pounds Zircon 150 150 Price: Zircon $ 3.300,00 $ 3.415,50 $ 3.535,04 $ Fixed Cost $ 400.000,00 $ 414.000,00 $ 428.490,00 $ Variable Cost $ 500.000,00 $ 517.500,00 $ 535.612,50 $ $ 2.639.250,00 $ 2.731.623,75 $ 2.827.230,58 $ 2.926.183,65 $ 3.028.600,08 $ 3.134.601,08 $ 3.244.312,12 Revenue: TZ 512.325,00 530.256,38 548.815,35 568.023,89 587.904,72 608.481,39 629.778,24 Revenue: Zircon $ 3.151.575,00 $ 3.261.880,13 $ 3.376.045,93 $ 3.494.207,54 $ 3.616.504,80 $ 3.743.082,47 $ 3.874.090,36 Total Revenue Less Operating Costs: 414.000,00 428.490,00 443.487,15 459.009,20 475.074,52 491.702,13 508.911,71 Fixed 517.500,00 535.612,50 554.358,94 573.761,50 593.843,15 614.627,66 636.139,63 Variable 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 Depreciation $ 791.503,57 $ 869.206,20 $ 949.628,41 $ 1.032.865,41 $ 1.119.015,70 $ 1.208.181,25 $ 1.300.467,59 Taxable Income 277.026,25 304.222,17 332.369,94 361.502,89 391.655,49 422.863,44 455.163,66 Tax (t = 35%) $ 514.477,32 $ 564.984,03 $ 617.258,47 $ 671.362,52 $ 727.360,20 $ 785.317,81 $ 845.303,93 Net Income 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 1.428.571,43 + Depreciation 10.000.000 - Investment $ $ (10.000.000) $ 1.943.048,75 $ 1.993.555,46 $ 2.045.829,90 $ 2.099.933,94 $ 2.155.931,63 $ 2.213.889,24 $ 2.273.875,36 Cash Flow $ (10.000.000) 1.704.428,73 1.533.976,19 1.380.876,91 1.243.329,47 1.119.723,33 1.008.618,16 908.725,46 PV of Cash Flow $ (10.000.000) (8.295.571,27) (6.761.595,08) (5.380.718,17) (4.137.388,70) (3.017.665,37) (2.009.047,22) (1.100.321,75) Cumulative PV $ (1.100.321,75) NPV $ 4.926.600,00 $ 5.099.031,00 $ 5.277.497,09 $ 5.462.209,48 $ 5.653.386,81 $ 5.851.255,35 $ 6.056.049,29 Revenue: TZ 512.325,00 530.256,38 548.815,35 568.023,89 587.904,72 608.481,39 629.778,24 Revenue: Zircon $ 5.438.925,00 $ 5.629.287,38 $ 5.826.312,43 $ 6.030.233,37 $ 6.241.291,54 $ 6.459.736,74 $ 6.685.827,53 Total Revenue Less Operating Costs: 879.750,00 910.541,25 942.410,19 975.394,55 1.009.533,36 1.044.867,03 1.081.437,37 Fixed 517.500,00 535.612,50 554.358,94 573.761,50 593.843,15 614.627,66 636.139,63 Variable 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 Depreciation $ 2.855.960,71 $ 2.997.419,34 $ 3.143.829,02 $ 3.295.363,03 $ 3.452.200,74 $ 3.614.527,76 $ 3.782.536,24 Taxable Income 999.586,25 1.049.096,77 1.100.340,16 1.153.377,06 1.208.270,26 1.265.084,72 1.323.887,68 Tax (t = 35%) $ 1.856.374,46 $ 1.948.322,57 $ 2.043.488,86 $ 2.141.985,97 $ 2.243.930,48 $ 2.349.443,05 $ 2.458.648,55 Net Income 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 + Depreciation 8.300.000 - Investment $ $ (8.300.000) $ 3.042.088,75 $ 3.134.036,86 $ 3.229.203,15 $ 3.327.700,26 $ 3.429.644,77 $ 3.535.157,33 $ 3.644.362,84 Cash Flow $ (8.300.000) 2.668.498,90 2.411.539,59 2.179.620,14 1.970.265,69 1.781.250,02 1.610.570,12 1.456.423,41 PV of Cash Flow $ (8.300.000) (5.631.501,10) (3.219.961,50) (1.040.341,36) 929.924,33 2.711.174,35 4.321.744,48 5.778.167,88 Cumulative PV $ 5.778.167,88 NPV 3,50% 340 8.034,19 $ 150 3.535,04 $ 428.490,00 $ 535.612,50 $ Cheaper Investment: Cheap Price TZ Inflation Rate Tons TZ Price: TZ $ 7.500 $ Pounds Zircon Price: Zircon $ 3.300 $ Fixed Cost $ 850.000 $ Variable Cost $ 500.000 $ 3,50% 340 7.762,50 $ 150 3.415,50 $ 414.000,00 $ 517.500,00 $ 3,50% 340 7.762,50 $ 150 3.415,50 $ 879.750,00 $ 517.500,00 $ 3,50% 340 8.034,19 $ 150 3.535,04 $ 910.541,25 $ 535.612,50 $ 3,50% 340 8.315,38 $ 150 3.658,77 $ 942.410,19 $ 554.358,94 $ 3,50% 340 11.087,18 $ 150 3.658,77 $ 443.487,15 $ 554.358,94 $ 3,50% 340 11.475,23 $ 150 3.786,83 $ 459.009,20 $ 573.761,50 $ 3,50% 340 11.876,86 $ 150 3.919,36 $ 475.074,52 $ 593.843,15 $ 3,50% 340 12.292,55 $ 150 4.056,54 $ 491.702,13 $ 614.627,66 $ 3,50% 340 12.722,79 150 4.198,52 508.911,71 636.139,63 Expensive Investment High Price TZ 15% Cost Overrun: Inflation Rate 3,50% 3,50% Tons TZ 340 340 Price: TZ $ 14.000,00 $ 14.490,00 $ 14.997,15 $ Pounds Zircon 150 150 Price: Zircon $ 3.300,00 $ 3.415,50 $ 3.535,04 $ Fixed Cost $ 400.000,00 $ 414.000,00 $ 428.490,00 $ Variable Cost $ 500.000,00 $ 517.500,00 $ 535.612,50 $ $ 3.519.000,00 $ 3.642.165,00 $ 3.769.640,78 $ 3.901.578,20 $ 4.038.133,44 $ 4.179.468,11 $ 4.325.749,49 Revenue: TZ 512.325,00 530.256,38 548.815,35 568.023,89 587.904,72 608.481,39 629.778,24 Revenue: Zircon $ 4.031.325,00 $ 4.172.421,38 $ 4.318.456,12 $ 4.469.602,09 $ 4.626.038,16 $ 4.787.949,50 $ 4.955.527,73 Total Revenue Less Operating Costs: 414.000,00 428.490,00 443.487,15 459.009,20 475.074,52 491.702,13 508.911,71 Fixed 517.500,00 535.612,50 554.358,94 573.761,50 593.843,15 614.627,66 636.139,63 Variable 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 Depreciation $ 1.456.967,86 $ 1.565.461,73 $ 1.677.752,89 $ 1.793.974,24 $ 1.914.263,34 $ 2.038.762,56 $ 2.167.619,25 Taxable Income 509.938,75 547.911,61 587.213,51 627.890,99 669.992,17 713.566,90 758.666,74 Tax (t = 35%) $ 947.029,11 $ 1.017.550,13 $ 1.090.539,38 $ 1.166.083,26 $ 1.244.271,17 $ 1.325.195,66 $ 1.408.952,51 Net Income 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 + Depreciation 11.500.000 - Investment $ $ (11.500.000) $ 2.589.886,25 $ 2.660.407,27 $ 2.733.396,52 $ 2.808.940,40 $ 2.887.128,32 $ 2.968.052,81 $ 3.051.809,65 Cash Flow $ (11.500.000) 2.271.830,04 2.047.097,01 1.844.964,80 1.663.118,21 1.499.483,98 1.352.204,93 1.219.617,04 PV of Cash Flow $ (11.500.000) (9.228.169,96) (7.181.072,95) (5.336.108,15) (3.672.989,94) (2.173.505,97) (821.301,03) 398.316,01 Cumulative PV $ 398.316,01 NPV 3,50% 340 15.522,05 $ 150 3.658,77 $ 443.487,15 $ 554.358,94 $ 3,50% 340 16.065,32 $ 150 3.786,83 $ 459.009,20 $ 573.761,50 $ 3,50% 340 16.627,61 $ 150 3.919,36 $ 475.074,52 $ 593.843,15 $ 3,50% 340 17.209,57 $ 150 4.056,54 $ 491.702,13 $ 614.627,66 $ 3,50% 340 17.811,91 150 4.198,52 508.911,71 636.139,63 Expensive Investment Cheap Price TZ 15% Cost Overrun: Inflation Rate 3,50% 3,50% Tons TZ 340 340 Price: TZ $ 7.500,00 $ 7.762,50 $ 8.034,19 $ Pounds Zircon 150 150 Price: Zircon $ 3.300,00 $ 3.415,50 $ 3.535,04 $ Fixed Cost $ 400.000,00 $ 414.000,00 $ 428.490,00 $ Variable Cost $ 500.000,00 $ 517.500,00 $ 535.612,50 $ $ 4.926.600,00 $ 5.099.031,00 $ 5.277.497,09 $ 5.462.209,48 $ 5.653.386,81 $ 5.851.255,35 $ 6.056.049,29 Revenue: TZ 512.325,00 530.256,38 548.815,35 568.023,89 587.904,72 608.481,39 629.778,24 Revenue: Zircon $ 5.438.925,00 $ 5.629.287,38 $ 5.826.312,43 $ 6.030.233,37 $ 6.241.291,54 $ 6.459.736,74 $ 6.685.827,53 Total Revenue Less Operating Costs: 414.000,00 428.490,00 443.487,15 459.009,20 475.074,52 491.702,13 508.911,71 Fixed 517.500,00 535.612,50 554.358,94 573.761,50 593.843,15 614.627,66 636.139,63 Variable 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 Depreciation $ 2.864.567,86 $ 3.022.327,73 $ 3.185.609,20 $ 3.354.605,52 $ 3.529.516,72 $ 3.710.549,80 $ 3.897.919,05 Taxable Income 1.002.598,75 1.057.814,71 1.114.963,22 1.174.111,93 1.235.330,85 1.298.692,43 1.364.271,67 Tax (t = 35%) $ 1.861.969,11 $ 1.964.513,03 $ 2.070.645,98 $ 2.180.493,59 $ 2.294.185,87 $ 2.411.857,37 $ 2.533.647,38 Net Income 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 + Depreciation 11.500.000 - Investment $ $ (11.500.000) $ 3.504.826,25 $ 3.607.370,17 $ 3.713.503,12 $ 3.823.350,73 $ 3.937.043,01 $ 4.054.714,52 $ 4.176.504,52 Cash Flow $ (11.500.000) 3.074.408,99 2.775.754,21 2.506.508,83 2.263.730,56 2.044.776,77 1.847.273,39 1.669.087,09 PV of Cash Flow $ (11.500.000) (8.425.591,01) (5.649.836,80) (3.143.327,97) (879.597,40) 1.165.179,37 3.012.452,75 4.681.539,84 Cumulative PV $ 4.681.539,84 NPV 3,50% 340 8.315,38 $ 150 3.658,77 $ 443.487,15 $ 554.358,94 $ 3,50% 340 8.606,42 $ 150 3.786,83 $ 459.009,20 $ 573.761,50 $ 3,50% 340 8.907,65 $ 150 3.919,36 $ 475.074,52 $ 593.843,15 $ 3,50% 340 9.219,41 $ 150 4.056,54 $ 491.702,13 $ 614.627,66 $ 3,50% 340 9.542,09 150 4.198,52 508.911,71 636.139,63 $ 2.639.250,00 $ 2.731.623,75 $ 2.827.230,58 $ 2.926.183,65 $ 3.028.600,08 $ 3.134.601,08 $ 3.244.312,12 512.325,00 530.256,38 548.815,35 568.023,89 587.904,72 608.481,39 629.778,24 $ 3.151.575,00 $ 3.261.880,13 $ 3.376.045,93 $ 3.494.207,54 $ 3.616.504,80 $ 3.743.082,47 $ 3.874.090,36 $ $ 414.000,00 428.490,00 443.487,15 459.009,20 475.074,52 491.702,13 508.911,71 517.500,00 535.612,50 554.358,94 573.761,50 593.843,15 614.627,66 636.139,63 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 577.217,86 $ 654.920,48 $ 735.342,70 $ 818.579,69 $ 904.729,98 $ 993.895,53 $ 1.086.181,88 202.026,25 229.222,17 257.369,94 286.502,89 316.655,49 347.863,44 380.163,66 375.191,61 $ 425.698,31 $ 477.972,75 $ 532.076,80 $ 588.074,49 $ 646.032,10 $ 706.018,22 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 1.642.857,14 11.500.000 $ (11.500.000) $ 2.018.048,75 $ 2.068.555,46 $ 2.120.829,90 $ 2.174.933,94 $ 2.230.931,63 $ 2.288.889,24 $ 2.348.875,36 $ (11.500.000) 1.770.218,20 1.591.686,25 1.431.499,77 1.287.735,49 1.158.675,98 1.042.787,15 938.698,26 $ (11.500.000) (9.729.781,80) (8.138.095,54) (6.706.595,77) (5.418.860,28) (4.260.184,30) (3.217.397,15) (2.278.698,89) $ (2.278.698,89) 3,50% 3,50% 3,50% 3,50% 340 340 340 340 8.606,42 $ 8.907,65 $ 9.219,41 $ 9.542,09 150 150 150 150 3.786,83 $ 3.919,36 $ 4.056,54 $ 4.198,52 975.394,55 $ 1.009.533,36 $ 1.044.867,03 $ 1.081.437,37 573.761,50 $ 593.843,15 $ 614.627,66 $ 636.139,63 $ 2.639.250,00 $ 2.731.623,75 $ 2.827.230,58 $ 2.926.183,65 $ 3.028.600,08 $ 3.134.601,08 $ 3.244.312,12 512.325,00 530.256,38 548.815,35 568.023,89 587.904,72 608.481,39 629.778,24 $ 3.151.575,00 $ 3.261.880,13 $ 3.376.045,93 $ 3.494.207,54 $ 3.616.504,80 $ 3.743.082,47 $ 3.874.090,36 $ $ 879.750,00 910.541,25 942.410,19 975.394,55 1.009.533,36 1.044.867,03 1.081.437,37 517.500,00 535.612,50 554.358,94 573.761,50 593.843,15 614.627,66 636.139,63 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 568.610,71 $ 630.012,09 $ 693.562,51 $ 759.337,20 $ 827.414,00 $ 897.873,49 $ 970.799,06 199.013,75 220.504,23 242.746,88 265.768,02 289.594,90 314.255,72 339.779,67 369.596,96 $ 409.507,86 $ 450.815,63 $ 493.569,18 $ 537.819,10 $ 583.617,77 $ 631.019,39 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 1.185.714,29 8.300.000 $ (8.300.000) $ 1.555.311,25 $ 1.595.222,14 $ 1.636.529,92 $ 1.679.283,47 $ 1.723.533,39 $ 1.769.332,06 $ 1.816.733,68 $ (8.300.000) 1.364.308,11 1.227.471,64 1.104.611,08 994.270,62 895.149,23 806.083,88 726.034,58 $ (8.300.000) (6.935.691,89) (5.708.220,25) (4.603.609,17) (3.609.338,54) (2.714.189,31) (1.908.105,43) (1.182.070,85) $ (1.182.070,85) www.elsolucionario.net Expensive Investment: Inflation Rate Tons TZ Price: TZ $ Pounds Zircon Price: Zircon $ Fixed Cost $ Variable Cost $ www.elsolucionario.net Table 8-6: Forecasted Income Statement ($ figures in thousands Except price per yard.) Year Yards sold 100 100 100 Price per yard 30 30 30 Revenue (1 x 2) 3000,00 3000,00 3000,00 Cost of goods sold 2100,00 2184,00 2271,36 Gross cash profit (3-4) 900,00 816,00 728,64 Depreciation 250,00 250,00 250,00 Pre-tax Income (5-6) 650,00 566,00 478,64 Tax at 35% 227,50 198,10 167,52 Net income (7-8) 422,50 367,90 311,12 The forecasted income statement uses straight-line depreciation MACRS depreciation should be used to determine cash flow from operations Cost of Plant Refurbishing($thousands) Year MACRS % Plant Refurbishing Deprec Cost of New Machinery($thousands) Year MACRS % Machinery Depreciation Salvage Value? Year Yards sold Price per yard Revenue (1 x 2) Cost of goods sold Gross cash profit (3-4) 500 10-years MACRS 10% 18% 14,40% 50 90 72 Book Value 1000 5-year MACRS class 20% 32% 19,20% 200 320 192 Book Value 0 100 100 100 30 30 30 3000,00 3000,00 3000,00 2100,00 2184,00 2271,36 900,00 816,00 728,64 Depreciation 250,00 410,00 264,00 Pre-tax Income (5-6) 650,00 406,00 464,64 Tax at 35% 227,50 142,10 162,62 Net income (7-8) 422,50 263,90 302,02 10 Depreciation 250,00 410,00 264,00 www.elsolucionario.net Example: Minicase on Page 237 of textbook Bring the book or a copy of page 237 with you to class Wednesday, Oct 15! www.elsolucionario.net Opportunity Cost of Capital = 12% 672,50 673,90 566,02 -1500 -300 -1800 NPV = 672,5 716,420 or What about the offer to buy the plant and land for $1.5 million? This represents an opportunity cost Book value = 10,000 After-tax proceeds if plan & land is sold today: 673,9 566,016 716420 www.elsolucionario.net 11 Operating Cash Flow (10+11) 12 Capital Investment Cash Flow 13 Working Capital Investment CF 14 Tax Savings on Pl& Eq SV-BV 15 Sale of land 16 Taxes on Sale of Land 35(600-10) 17 Total Cash Flow (11+12+13+14+15+16) www.elsolucionario.net 100 100 30 30 3000,00 3000,00 2362,21 2456,70 637,79 543,30 250,00 250,00 387,79 293,30 135,72 102,65 252,06 190,64 11,52% 9,22% 57,6 46,1 Book Value 184,3 ACRS class 11,52% 11,52% 115,2 115,2 Book Value 57,6 100 100 30 30 3000,00 3000,00 2362,21 2456,70 637,79 543,30 172,80 161,30 464,99 382,00 162,74 133,70 302,24 248,30 172,80 161,30 www.elsolucionario.net e per yard.) www.elsolucionario.net 409,60 300 84,665 600 -206,5 475,041 1187,76 Need 10% of Revenue at start Plant and machinery will have no SV Estimated sales price of land 10 (thousand) is BV of land www.elsolucionario.net 475,04 www.elsolucionario.net Example: Minicase on Page 237 of textbook Bring the book or a copy of page 237 with you to class Wednesday, Oct 15! Table 8-6: Forecasted Income Statement ($ figures in thousands Except price per yard.) Year 100 100 Yards sold 30 30 Price per yard 3000,00 3000,00 Revenue (1 x 2) 2100,00 2184,00 Cost of goods sold 900,00 816,00 Gross cash profit (3-4) 250,00 250,00 Depreciation Pre-tax Income (5-6) 650,00 566,00 Tax at 35% 227,50 198,10 Net income (7-8) 422,50 367,90 100 30 3000,00 2271,36 728,64 250,00 478,64 167,52 311,12 100 30 3000,00 2362,21 637,79 250,00 387,79 135,72 252,06 100 30 3000,00 2456,70 543,30 250,00 293,30 102,65 190,64 11,52% 57,6 9,22% 46,1 184,3 11,52% 115,2 11,52% 115,2 57,6 100 30 3000,00 2362,21 637,79 100 30 3000,00 2456,70 543,30 Cost of Plant Refurbishing Year MACRS % Plant Refurbishing Deprec 500 10-years MACRS 10% 18% 14,40% 50 90 72 Book Value 1000 5-year MACRS class 20% 32% 19,20% 200 320 192 Book Value for both plant & equipment 100 100 100 30 30 30 3000,00 3000,00 3000,00 2100,00 2184,00 2271,36 900,00 816,00 728,64 Cost of New Machinery Year MACRS % Machinery Depreciation Salvage Value? Year Yards sold Price per yard Revenue (1 x 2) Cost of goods sold Gross cash profit (3-4) Depreciation 250,00 410,00 264,00 172,80 161,30 Pre-tax Income (5-6) 650,00 406,00 464,64 464,99 382,00 Tax at 35% 227,50 142,10 162,62 162,74 133,70 Net income (7-8) 422,50 263,90 302,02 302,24 248,30 10 Depreciation 250,00 410,00 264,00 172,80 161,30 11 Operating Cash Flow (10+11) 12 Capital Investment Cash Flow 13 Working Capital Investment CF 14 Tax Savings on Pl& Eq SV-BV 15 Sale of land 16 Taxes on Sale of Land 35(600-10) 17 Total Cash Flow (11+12+13+14+15+16) 672,50 673,90 566,02 475,04 409,60 475,04 300,00 84,66 600,00 -206,50 1187,76 Opportunity Cost of Capital = 12% -1500,00 -300,00 -1800,00 NPV = 672,50 673,90 716,420 or What about the offer to buy the plant and land for $1.5 million? This represents an opportunity cost After-tax proceeds if plan & land is sold today: 1,500,000 - 35(1,500,000-10,000)= 566,02 716419,9677 978500 Need 10% of Revenue at start Plant and machinery will have no SV Estimated sales price of land 10 (thousand) is BV of land www.elsolucionario.net The forecasted income statement uses straight-line depreciation MACRS depreciation should be used to determine cash flow from operations Need 10% of Revenue at start Plant and machinery will have no SV Estimated sales price of land 10 (thousand) is BV of land www.elsolucionario.net www.elsolucionario.net www.elsolucionario.net 100.000 $30 Year Revenue - Cost of Goods Sold - Depreciation on Plant - Depreciation on Machinery Taxable Income - Tax (t=.35) Net Income + Depreciation Expense Operating Cash Flow Gross Plant Refurbishment - Accumulated Depreciation Net Plant Refurbishment $ $ 3.000.000,00 2.100.000,00 50.000,00 200.000,00 $ 650.000,00 227.500,00 $ 422.500,00 $ 250.000,00 $ 672.500,00 (500.000,00) $ $ 10-year ACRS Schedule Depreciation Expense Plant 500.000,00 50.000,00 450.000,00 0,1 50.000,00 Plant Write OFF Tax Rate Plant Tax Savings Gross Machinery - Accumulated Depreciation Net Machinery $ (1.000.000,00) $ 1.000.000,00 200.000,00 $ 800.000,00 5-year ACRS Schedule Depreciation Expense Machinery 0,2 200.000,00 Machinery Write OFF Tax Rate Machinery Tax Savings Working Capital (10% Sales) Change in Working Capital Sale of Land @ $600,000 - Book Value Gain on Sale Tax on Gain (t=35%) Cash Flow from Sale of Land Net Cash Flow $ $ 300.000,00 $ (300.000,00) $ 300.000,00 - Scrap - BV t(gain) Scrap - tax $ (1.800.000,00) $ 672.500,00 www.elsolucionario.net Yards Sold Price per Yard www.elsolucionario.net Sale of Land @ $1,500,000 - Book Value Gain on Sale Tax on Gain (t=35%) Cash Flow from Sale of Land Net Cash Flow PV of CF Cumulative PV Sale of Land @ $1,500,000 in real terms - Book Value Gain on Sale Tax on Gain (t=35%) Cash Flow from Sale of Land Net Cash Flow PV of CF Cumulative PV Sell Land Today for $1,500,000 - Book Value Gain on Sale Tax on Gain (t=35%) Cash Flow from Sale of Land (1.800.000,00) (1.800.000,00) 600.446,43 (1.199.553,57) Scrap - BV t(gain) Scrap - tax (1.800.000,00) (1.800.000,00) (1.800.000,00) 672.500,00 600.446,43 (1.199.553,57) adj for 4% inflation per year Scrap - BV t(gain) Scrap - tax (1.800.000,00) (1.800.000,00) (1.800.000,00) $ 1.500.000,00 10.000,00 1.490.000,00 521.500,00 $ 978.500,00 672.500,00 600.446,43 (1.199.553,57) www.elsolucionario.net PV of CF Cumulative PV 100.000 $30 100.000 $30 100.000 $30 100.000 $30 $ 3.000.000,00 2.184.000,00 90.000,00 320.000,00 $ 406.000,00 142.100,00 $ 263.900,00 $ 410.000,00 $ 673.900,00 $ 3.000.000,00 2.271.360,00 72.000,00 192.000,00 $ 464.640,00 162.624,00 $ 302.016,00 $ 264.000,00 $ 566.016,00 $ 3.000.000,00 2.362.210,00 57.600,00 115.200,00 $ 464.990,00 162.746,50 $ 302.243,50 $ 172.800,00 $ 475.043,50 $ 3.000.000,00 2.456.700,00 46.100,00 115.200,00 $ 382.000,00 133.700,00 $ 248.300,00 $ 161.300,00 $ 409.600,00 $ $ $ $ $ 500.000,00 140.000,00 360.000,00 $ 0,18 90.000,00 500.000,00 212.000,00 288.000,00 $ 0,144 72.000,00 500.000,00 269.600,00 230.400,00 $ 0,1152 57.600,00 500.000,00 315.700,00 184.300,00 0,0922 46.100,00 184.300,00 0,35 64.505,00 $ 1.000.000,00 520.000,00 $ 480.000,00 $ 1.000.000,00 712.000,00 $ 288.000,00 0,32 320.000,00 $ 1.000.000,00 827.200,00 $ 172.800,00 0,192 192.000,00 $ 1.000.000,00 942.400,00 $ 57.600,00 0,1152 115.200,00 0,1152 115.200,00 57.600,00 0,35 20.160,00 $ $ $ 300.000,00 - 673.900,00 $ $ $ 300.000,00 - 566.016,00 $ $ 300.000,00 - $ 600.000,00 10.000,00 590.000,00 206.500,00 $ 475.043,50 $ $ 300.000,00 Year Investment Cash Flows $ 393.500,00 Operating Cash Flow Terminal Cash Flows $ 1.187.765,00 Net Cash Flow www.elsolucionario.net www.elsolucionario.net www.elsolucionario.net 402.879,01 (259.445,61) 301.898,73 42.453,12 $ 1.500.000,00 10.000,00 1.490.000,00 521.500,00 673.900,00 537.228,95 (662.324,62) 566.016,00 402.879,01 (259.445,61) 475.043,50 301.898,73 42.453,12 $ 1.824.979,35 10.000,00 1.814.979,35 635.242,77 673.900,00 537.228,95 (662.324,62) 566.016,00 402.879,01 (259.445,61) 475.043,50 301.898,73 42.453,12 673.969,76 PV of Cash Flow 716.422,88 Cumulative PV Year Investment Cash Flows Operating Cash Flow Terminal Cash Flows $ 978.500,00 Net Cash Flow PV of Cash Flow 1.772.765,00 Cumulative PV 1.005.914,47 1.048.367,59 Year $ 1.189.736,58 Investment Cash Flows Operating Cash Flow $ 1.984.001,58 Terminal Cash Flows $ 1.125.775,78 Net Cash Flow 1.168.228,90 PV of Cash Flow Cumulative PV www.elsolucionario.net 537.228,95 (662.324,62) www.elsolucionario.net www.elsolucionario.net $ (1.800.000,00) $ 672.500,00 $ 673.900,00 $ 566.016,00 $ 475.043,50 $ (1.800.000,00) $ 672.500,00 $ 673.900,00 $ 566.016,00 $ 475.043,50 $ 409.600,00 778.165,00 $ 1.187.765,00 www.elsolucionario.net 600.446,43 (1.199.553,57) 537.228,95 (662.324,62) 402.879,01 (259.445,61) (1.800.000,00) 672.500,00 566.016,00 475.043,50 475.043,50 301.898,73 42.453,12 672.500,00 600.446,43 (1.199.553,57) 673.900,00 537.228,95 (662.324,62) 566.016,00 402.879,01 (259.445,61) (1.800.000,00) (1.800.000,00) (1.800.000,00) (1.800.000,00) 672.500,00 600.446,43 (1.199.553,57) 673.900,00 (1.800.000,00) (1.800.000,00) (1.800.000,00) 672.500,00 301.898,73 42.453,12 673.900,00 566.016,00 475.043,50 673.900,00 537.228,95 (662.324,62) 566.016,00 402.879,01 (259.445,61) 475.043,50 301.898,73 42.453,12 673.969,76 716.422,88 409.600,00 1.363.165,00 1.772.765,00 1.005.914,47 1.048.367,59 409.600,00 1.574.401,58 1.984.001,58 1.125.775,78 1.168.228,90 www.elsolucionario.net (1.800.000,00) (1.800.000,00) ... profits reflect performance in the current year only Profit maximizers may try to improve this year’s profits at the expense of future profits But stock price maximizers will take account of. .. accounting profits in one year versus accounting profits in another year For example, writing off a bad investment may reduce this year’s profits but increase profits in future years Which year’s profits... funds When the mutual fund? ??s shareholders want to redeem their shares, the mutual fund is often forced to sell its securities In order to maintain liquidity for its shareholders, the mutual fund