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1. Problem 12-3 Cash flow [LO2] Assume a firm has earnings before depreciation and taxes of $650,000 and no depreciation. It is in a 40

1. Problem 12-3 Cash flow [LO2] Assume a firm has earnings before depreciation and taxes of $650,000 and no depreciation. It is in a 40 percent tax bracket. a. Compute its cash flow. b. Assume it has $650,000 in depreciation. Recompute its cash flow. c. How large a cash flow benefit did the depreciation provide?

2.

The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $55,000. The annual cash flows have the following projections. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year Cash Flow
1 $ 29,000
2 27,000
3 27,000
4 32,000
5 10,000

a. If the cost of capital is 9 percent, what is the net present value of selecting a new machine? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

b. What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

c. Should the project be accepted?

multiple choice

  • Yes

  • No

3.

The Caffeine Coffee Company uses the modified internal rate of return. The firm has a cost of capital of 8 percent. The project being analyzed is as follows ($36,000 investment): Use Appendix A and Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year Cash Flow
1 $ 19,000
2 17,000
3 13,000

What is the modified internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

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