hi...i attached problem 10... i do not understand how he got operating cash flow for first and second techron....

also for first techron why did he multiply -35,00(1-0.35)... (pretax operating cost with ( 1-tax))

which rule did he use ..top down , or bottom up or tax shield

also for NPV why did he add after tax salvage for last cash flow

thanks ;) please explain in detail

10. We will need the aftertax salvage value of the equipment to compute the EAC. Even though the equipment for each product has a different initial cost, both have the same salvage value. The aftertax salvage value for both is: Both cases: aftertax salvage value = $20,000(1 - 0.35) = $13,000 To calculate the EAC, we first need the OCF and NPV of each option. The OCF and NPV for Techron I is: OCF = - $35,000(1 - 0.35) + 0.35($215,000/3) = $2,333.33 NPV = -$215,000 + $2,333.33(PVIFA12%,3) + ($13,000/1.123) = -$200,142.58 EAC = -$200,142.58 / (PVIFA12%,3) = -$83,329.16 And the OCF and NPV for Techron II is: OCF = - $44,000(1 - 0.35) + 0.35($270,000/5) = -$9,700 NPV = -$270,000 - $9,700(PVIFA12%,5) + ($13,000/1.125) = -$297,589.78 EAC = -$297,589.78 / (PVIFA12%,5) = -$82,554.30 The two milling machines have unequal lives, so they can only be compared by expressing both on an equivalent annual basis, which is what the EAC method does. Thus, you prefer the Techron II because it has the lower (less negative) annual cost. \fhi...i attached problem 10... i do not understand how he got operating cash flow for first and second techron.... also for first techron why did he multiply -35,00(1-0.35)... (pretax operating cost with ( 1-tax)) which rule did he use ..top down , or bottom up or tax shield also for NPV why did he add after tax salvage for last cash flow thanks ;) please explain in detail 10. We will need the after tax salvage value of the equipment to compute the EAC. Even though the equipment for each product has a different initial cost, both have the same salvage value. The after tax salvage value for both is: Both cases: after tax salvage value = Salvage - Tax rate*(Salvage-Book Value) = $20,000- 0.35*(20,000- 0) = $13,000 To calculate the EAC, we first need the OCF and NPV of each option. The OCF and NPV for Techron I is: OCF = (PreTax Cost+Deprecition)*(1- Tax rate) + Addback dep So OCF = PreTax Cost*(1- Tax rate) + Dep*(1- Tax rate) + Dep So OCF = PreTax Cost*(1- Tax rate) - Taxrate*Dep Now Pretax Cost is a Cash outflow. So Pretax Cost = -$35,000 Depreciation is again debited. So Dep = -(215,000/3). Putting above values, we get So OCF = - $35,000(1 - 0.35) + 0.35($215,000/3) = $2,333.33 After Tax Salvage is a Cash Inflow in Y3. So it will be discounted to Y0 by dividing it by (1+Discount rate) & then dicountiung it for 3 periods . So It will be 13000/(1+12%)^3 NPV = -$215,000 + $2,333.33(PVIFA12%,3) + ($13,000/1.123) = -$200,142.58 EAC = -$200,142.58 / (PVIFA12%,3) = -$83,329.16 Techron-I Initial Cost $ Y0 (215,000) PreTax Cost Dep SLN Total Pre Tax Cost Less Tax After Tax CF Addback Dep OCF After Tax Salvage Net OCF NPV = EAC $ (215,000) $ (215,000) $(200,142.58) ($83,329.16) Y1 Y2 $ (35,000.00) $ (71,666.67) $(106,666.67) $ 37,333.33 $ (69,333.33) $ 71,666.67 $ 2,333.33 $ (35,000.00) $ (71,666.67) $(106,666.67) $ 37,333.33 $ (69,333.33) $ 71,666.67 $ 2,333.33 $ $ 2,333.33 2,333.33 Y3 $ (35,000.00) $ (71,666.67) $(106,666.67) $ 37,333.33 $ (69,333.33) $ 71,666.67 $ 2,333.33 $ 13,000 $ 15,333.33 And the OCF and NPV for Techron II is: OCF = (PreTax Cost+Deprecition)*(1- Tax rate) + Addback dep So OCF = PreTax Cost*(1- Tax rate) + Dep*(1- Tax rate) + Dep So OCF = PreTax Cost*(1- Tax rate) - Taxrate*Dep Now Pretax Cost is a Cash outflow. So Pretax Cost = -$44,000 Depreciation is again debited. So Dep = -(270,000/5). Putting above values, we get OCF = - $44,000(1 - 0.35) + 0.35($270,000/5) = -$9,700 After Tax Salvage is a Cash Inflow in Y3. So it will be discounted to Y0 by dividing it by (1+Discount rate) & then dicountiung it for 3 periods . So It will be 13000/(1+12%)^3 NPV = -$270,000 - $9,700(PVIFA12%,5) + ($13,000/1.125) = -$297,589.78 EAC = -$297,589.78 / (PVIFA12%,5) = -$82,554.30 Techron-II Y1 Y2 Y3 Y4 Y5 PreTax Cost $ (44,000.00) $ (44,000.00) $ (44,000.00) $ (44,000.00) $ (44,000.00) Dep SLN $ (54,000.00) $ (54,000.00) $ (54,000.00) $ (54,000.00) $ (54,000.00) Total Pre Tax Cost $ (98,000.00) $ (98,000.00) $ (98,000.00) $ (98,000.00) $ (98,000.00) Less Tax $ $ $ $ $ After Tax CF $ (63,700.00) $ (63,700.00) $ (63,700.00) $ (63,700.00) $ (63,700.00) Addback Dep $ 54,000.00 $ 54,000.00 $ 54,000.00 $ 54,000.00 $ 54,000.00 $ (9,700.00) $ (9,700.00) $ (9,700.00) $ (9,700.00) $ (9,700.00) Initial Cost OCF Y0 $ $ (270,000) (270,000) 34,300.00 34,300.00 34,300.00 34,300.00 After Tax Salvage 34,300.00 $ Net OCF $ NPV = $ (9,700.00) $ (9,700.00) $ (9,700.00) $ (9,700.00) 13,000 $ 3,300.00 ($297,589.78) EAC (270,000) ($82,554.30) The two milling machines have unequal lives, so they can only be compared by expressing both on an equivalent annual basis, which is what the EAC method does. Thus, you prefer the Techron II because it has the lower (less negative) annual cost. Tax Rate Discount Rate 35% 12% Techron-I Y0 Initial Cost $ (215,000) PreTax Cost Dep SLN Total Pre Tax Cost Less Tax After Tax CF Addback Dep OCF $ (215,000) After Tax Salvage Net OCF $ (215,000) NPV = $ (200,142.58) EAC ($83,329.16) Techron-II Y0 Initial Cost $ (270,000) PreTax Cost Dep SLN Total Pre Tax Cost Less Tax After Tax CF Addback Dep OCF $ (270,000) After Tax Salvage Net OCF $ (270,000) NPV = ($297,589.78) EAC ($82,554.30) Y1 $ $ $ $ $ $ $ $ (35,000.00) (71,666.67) (106,666.67) 37,333.33 (69,333.33) 71,666.67 2,333.33 2,333.33 Y2 $ $ $ $ $ $ $ $ Y1 $ $ $ $ $ $ $ $ (44,000.00) (54,000.00) (98,000.00) 34,300.00 (63,700.00) 54,000.00 (9,700.00) (35,000.00) (71,666.67) (106,666.67) 37,333.33 (69,333.33) 71,666.67 2,333.33 2,333.33 Y3 $ $ $ $ $ $ $ $ $ Y2 $ $ $ $ $ $ $ (9,700.00) $ (44,000.00) (54,000.00) (98,000.00) 34,300.00 (63,700.00) 54,000.00 (9,700.00) (35,000.00) (71,666.67) (106,666.67) 37,333.33 (69,333.33) 71,666.67 2,333.33 13,000 15,333.33 Y3 $ $ $ $ $ $ $ (9,700.00) $ after tax salvage value = Salvage - Tax rate*(Salvage-Book Value) = $20,000- 0.35*(20,000- 0) = $13,000 (44,000.00) (54,000.00) (98,000.00) 34,300.00 (63,700.00) 54,000.00 (9,700.00) Y4 $ $ $ $ $ $ $ (44,000.00) (54,000.00) (98,000.00) 34,300.00 (63,700.00) 54,000.00 (9,700.00) (9,700.00) $ (9,700.00) Y5 $ $ $ $ $ $ $ $ $ (44,000.00) (54,000.00) (98,000.00) 34,300.00 (63,700.00) 54,000.00 (9,700.00) 13,000 3,300.00 hi...i attached problem 10... i do not understand how he got operating cash flow for first and second techron.... also for first techron why did he multiply -35,00(1-0.35)... (pretax operating cost with ( 1-tax)) which rule did he use ..top down , or bottom up or tax shield also for NPV why did he add after tax salvage for last cash flow thanks ;) please explain in detail 10. We will need the after tax salvage value of the equipment to compute the EAC. Even though the equipment for each product has a different initial cost, both have the same salvage value. The after tax salvage value for both is: Both cases: after tax salvage value = Salvage - Tax rate*(Salvage-Book Value) = $20,000- 0.35*(20,000- 0) = $13,000 To calculate the EAC, we first need the OCF and NPV of each option. The OCF and NPV for Techron I is: OCF = (PreTax Cost+Deprecition)*(1- Tax rate) + Addback dep So OCF = PreTax Cost*(1- Tax rate) + Dep*(1- Tax rate) + Dep So OCF = PreTax Cost*(1- Tax rate) - Taxrate*Dep Now Pretax Cost is a Cash outflow. So Pretax Cost = -$35,000 Depreciation is again debited. So Dep = -(215,000/3). Putting above values, we get So OCF = - $35,000(1 - 0.35) + 0.35($215,000/3) = $2,333.33 After Tax Salvage is a Cash Inflow in Y3. So it will be discounted to Y0 by dividing it by (1+Discount rate) & then dicountiung it for 3 periods . So It will be 13000/(1+12%)^3 NPV = -$215,000 + $2,333.33(PVIFA12%,3) + ($13,000/1.123) = -$200,142.58 EAC = -$200,142.58 / (PVIFA12%,3) = -$83,329.16 Techron-I Initial Cost $ Y0 (215,000) PreTax Cost Dep SLN Total Pre Tax Cost Less Tax After Tax CF Addback Dep OCF After Tax Salvage Net OCF NPV = EAC $ (215,000) $ (215,000) $(200,142.58) ($83,329.16) Y1 Y2 $ (35,000.00) $ (71,666.67) $(106,666.67) $ 37,333.33 $ (69,333.33) $ 71,666.67 $ 2,333.33 $ (35,000.00) $ (71,666.67) $(106,666.67) $ 37,333.33 $ (69,333.33) $ 71,666.67 $ 2,333.33 $ $ 2,333.33 2,333.33 Y3 $ (35,000.00) $ (71,666.67) $(106,666.67) $ 37,333.33 $ (69,333.33) $ 71,666.67 $ 2,333.33 $ 13,000 $ 15,333.33 And the OCF and NPV for Techron II is: OCF = (PreTax Cost+Deprecition)*(1- Tax rate) + Addback dep So OCF = PreTax Cost*(1- Tax rate) + Dep*(1- Tax rate) + Dep So OCF = PreTax Cost*(1- Tax rate) - Taxrate*Dep Now Pretax Cost is a Cash outflow. So Pretax Cost = -$44,000 Depreciation is again debited. So Dep = -(270,000/5). Putting above values, we get OCF = - $44,000(1 - 0.35) + 0.35($270,000/5) = -$9,700 After Tax Salvage is a Cash Inflow in Y3. So it will be discounted to Y0 by dividing it by (1+Discount rate) & then dicountiung it for 3 periods . So It will be 13000/(1+12%)^3 NPV = -$270,000 - $9,700(PVIFA12%,5) + ($13,000/1.125) = -$297,589.78 EAC = -$297,589.78 / (PVIFA12%,5) = -$82,554.30 Techron-II Y1 Y2 Y3 Y4 Y5 PreTax Cost $ (44,000.00) $ (44,000.00) $ (44,000.00) $ (44,000.00) $ (44,000.00) Dep SLN $ (54,000.00) $ (54,000.00) $ (54,000.00) $ (54,000.00) $ (54,000.00) Total Pre Tax Cost $ (98,000.00) $ (98,000.00) $ (98,000.00) $ (98,000.00) $ (98,000.00) Less Tax $ $ $ $ $ After Tax CF $ (63,700.00) $ (63,700.00) $ (63,700.00) $ (63,700.00) $ (63,700.00) Addback Dep $ 54,000.00 $ 54,000.00 $ 54,000.00 $ 54,000.00 $ 54,000.00 $ (9,700.00) $ (9,700.00) $ (9,700.00) $ (9,700.00) $ (9,700.00) Initial Cost OCF Y0 $ $ (270,000) (270,000) 34,300.00 34,300.00 34,300.00 34,300.00 After Tax Salvage 34,300.00 $ Net OCF $ NPV = $ (9,700.00) $ (9,700.00) $ (9,700.00) $ (9,700.00) 13,000 $ 3,300.00 ($297,589.78) EAC (270,000) ($82,554.30) The two milling machines have unequal lives, so they can only be compared by expressing both on an equivalent annual basis, which is what the EAC method does. Thus, you prefer the Techron II because it has the lower (less negative) annual cost