Question

7. Turner Video will invest $86,500 in a project. The firm’s cost of capital is 10 percent. The investment will provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year	Inflow
1	$	29,000
2		31,000
3		35,000
4		39,000
5		43,000

The internal rate of return is 12 percent.

a. If the reinvestment assumption of the net present value method is used, what will be the total value of the inflows after five years? (Assume the inflows come at the end of each year.) (Do not round intermediate calculations and round your answer to 2 decimal places.)

	Total value of inflows

b. If the reinvestment assumption of the internal rate of return method is used, what will be the total value of the inflows after five years? (Use the given internal rate of return. Do not round intermediate calculations and round your answer to 2 decimal places.)

	Total value of inflows

11. An asset was purchased three years ago for $100,000. It falls into the five-year category for MACRS depreciation. The firm is in a 30 percent tax bracket. Use Table 12–12.

a. Compute the tax loss on the sale and the related tax benefit if the asset is sold now for $13,060. (Input all amounts as positive values. Do not round intermediate calculations and round your answers to whole dollars.)

	Tax loss on the sale Tax benefit

b. Compute the gain and related tax on the sale if the asset is sold now for $52,060. (Input all amounts as positive values. Do not round intermediate calculations and round your answers to whole dollars.)

	Taxable gain Tax obligation

Answer 1

Q7 - Part (a)

Reinvestment rate = WACC = 10%

Reinvestment horizon for a cash flow in year t = n = 5 - t

Please see the table below. The cell highlighted in yellow is your answer.

Total value of inflows =  211,969.90

Year	Inflow	Reinvestment Period	Future Value
t	C	n = 5 - t	FV = C x (1 + WACC)^n
1	29,000	4	42,458.90
2	31,000	3	41,261.00
3	35,000	2	42,350.00
4	39,000	1	42,900.00
5	43,000	0	43,000.00
WACC	10%	Total	211,969.90
IRR	12%

Q 7 - Part (b)

We have to redo the whole thing but this time reinvestment rate = IRR = 12%

Please see the table below. The cell highlighted in yellow is your answer.

Total value of inflows =   219,768.83

Year	Inflow	Reinvestment Period	Future Value
t	C	n = 5 - t	FV = C x (1 + IRR)^n
1	29,000	4	45,632.06
2	31,000	3	43,552.77
3	35,000	2	43,904.00
4	39,000	1	43,680.00
5	43,000	0	43,000.00
WACC	10%	Total	219,768.83
IRR	12%

Question 11 - a

Accumulated depreciation till 3 years under 5 years MACRS schedule = 20% + 32% + 19.2% = 71.2%

Hence, balance book value, BV = (1 - 71.2%) = 28.8% = 28.8% x 100,000 = $  28,800

Sale value, SV = $ 13,060

Bold underline figures are your answers.

Hence, tax loss on sale = BV - SV = 28,800 - 13,060 = $ 15,740

Tax benefit = tax rate x tax loss = 30% x 15,470 = $ 4,722

Question 11 - b

Sale value, SV = $ 52,060

Bold underline figures are your answers.

Hence, taxable gain = SV - BV = 52,060 - 28,800 = $ 23,260

Tax obligation = tax rate x taxable gain = 30% x 23,260 = $ 6,978