SOLUTIONS TO SELECTED PROBLEMS
Student: You should work the problem completely before referring to the solution.
CHAPTER 17
Solutions included for all or part of problems: 4, 6, 9, 12, 15, 18, 21, 24, 27, 29, 33, 36,
39, 42, 45, 48, 51, 54, 57, and 60
17.4
(a) Company 1
TI
= (1,500,000 + 31,000) 754,000 148,000 = $629,000
Taxes = 113,900 + 0.34(629,000 335,000) = $213,860
Company 2
TI
= $236,000
Taxes = $75,290
(b) Co. 1:
Co. 2:
213,860/1.5 million = 14.26%
75,290/820,000 = 9.2%
(c) Company 1
Taxes = (TI)(Te) = 629,000(0.34) = $213,860
% error with graduated tax = 0%
Company 2
Taxes = 236,000(0.34) = $80,240
% error = + 6.6%
17.6
Te = 0.076 + (1 0.076)(0.34) = 0.390
TI = $2.4 million
Taxes = 2,400,000(0.390) = $936,000
17.9
(a)
GI = 98,000 + 7500 = $105,500
TI = 105,500 10,500 = $95,000
Taxes = 0.10(7000) + 0.15(21,400) + 0.25(40,400) + 0.28(26,200)
= $21,346
(b) 21,346/98,000 = 21.8%
(c) Reduced taxes = 0.9(21,346) = $19,211
$19,211 = 0.10(7000) + 0.15(21,400) + 0.25(40,400) + 0.28(TI 26,200)
= 700 + 3210 + 10,100 + 0.28(x 68,800)
= 14,010 + 0.28(x 68,800)
0.28x = 24,465
x = $87,375
Chapter 17
Let y = new total of exemptions and deductions
TI = 87,375 = 105,500 y
y = $18,125
Total must increase from $10,500 to $18,125, which is a 73% increase.
17.12 Depreciation is used to find TI. Depreciation is not a true cash flow, and as such is
not a direct reduction when determining either CFBT or CFAT.
17.15 CFBT = CFAT + taxes
= [CFAT D(Te)]/(1 Te)
Te = 0.045 + 0.955(0.35) = 0.37925
CFBT = [2,000,000 (1,000,000)(0.37925)]/(1 0.37925)
= $2,610,955
17.18 (a) BV2 = 80,000 16,000 25,600 = $38,400
(b)
Year
0
1
2
(GI E)
50,000
50,000
P or
S
80,000
38,400
D
16,000
25,600
TI
34,000
24,400
Taxes
12,920
9,272
CFAT
-$80,000
37,080
79,128
17.21 Here Taxes = (CFBT depr)(tax rate). Select the SL method with n = 5 years.
Chapter 17
17.24 (a)
t=n
PWTS = (tax savings in year t)(P/F,i,t)
t=1
Select the method that maximizes PWTS.
(b) TSt = Dt(0.42). PWTS = $27,963
Year,t
1
2
3
4
17.27 (a)
(b)
Chapter 17
d
0.3333
0.4445
0.1481
0.0741
Depr
$26,664
35,560
11,848
5,928
CL = 5000 500 = $4500
TI = $4500
Tax savings = 0.40(4500) = $1800
CG = $10,000
DR = 0.2(100,000) = $20,000
TI = CG + DR = $30,000
Taxes = 30,000(0.4) = $12,000
3
TS____
$11,199
14,935
4,976
2,490
17.29 (a)
BV2 = 40,000 - 0.52(40,000) = $19,200
DR = 21,000 19,200 = $1800
TI = GI E D + DR = $6,000
Taxes = 6,000(0.35) = $2100
(b) CFAT = 20,000 3000 + 21,000 2100
= $35,900
17.33 In brief, net all short term, then all long term gains and losses. Finally, net the
gains and losses to determine what is reported on the return and how it is taxed.
17.36
0.08 = 0.12(1-tax rate)
Tax rate = 0.333
17.39 Since MARR = 25% exceeds the incremental i* of 17.26%, the incremental
investment is not justified. Sell NE now, retain TSE for the 4 years and then
dispose of it.
17.42 (a) PWA = -15,000 3000(P/A,14%,10) + 3000(P/F,14%,10)
= $-29,839
PWB = -22,000 1500(P/A,14%,10) + 5000(P/F,14%,10)
= $-28,476
Chapter 17
Select B with a slightly smaller PW value.
(b)
Machine A
Annual depreciation = (15,000 3,000)/10 = $1200
Tax savings = 4200(0.5) = $2100
CFAT = 3000 + 2100 = $900
PWA = 15,000 900(P/A,7%,10) + 3000(P/F,7%,10)
= $19,796
Machine B
Annual depreciation = $1700
Tax savings = $1600
CFAT = 1500 + 1600 = $100
PWB = 22,000 + 100(P/A,7%,10) + 5000(P/F,7%,10)
= $18,756
Select machine B
(c)
Machine A
Year
0
1
2
3
4
5
6
7
8
9
10
10
17.42 (cont)
P or S
$15,000
Year
0
1
2
3
4
5
6
P or S
$22,000
Chapter 17
3000
AOC
$3000
3000
3000
3000
3000
3000
3000
3000
3000
3000
AOC
$1500
1500
1500
1500
1500
1500
Depr
Tax savings
$3000
$3000
4800
3900
2880
2940
1728
2364
1728
2364
864
1932
0
1500
0
1500
0
1500
0
1500
1500
Machine B
Depr
$4400
7040
4224
2534
2534
1268
5
Tax savings
$2950
4270
2862
2017
2017
1384
CFAT
$15,000
0
900
-60
-636
-636
-1068
-1500
-1500
-1500
-1500
1500
CFAT
$22,000
1450
2770
1362
517
517
116
7
8
9
10
10
5000
1500
1500
1500
1500
-
0
0
0
0
-
750
750
750
750
2500
750
750
750
750
2500
PWA = $18,536. PWB = $16,850. Select machine B, as above.
17.45 (b1 and 2)
17.48 (a) From Problem 17.42(b) for years 1 through 10.
CFATA = $900
CFATB = $+100
Use a spreadsheet to find the incremental ROR and to determine the PW of
incremental CFAT versus incremental i values. If MARR < 9.75%, select B,
otherwise select A.
Chapter 17
(b) Use the PW vs. incremental i plot to select between A and B.
MARR
5%
9
10
12
Select
B
B
A
A
17.51 Defender
Annual SL depreciation = 450,000 /12 = $37,500
Annual tax savings = (37,500 + 160,000)(0.32) = $63,200
AWD = -50,000(A/P,10%,5) 160,000 + 63,200
= $109,990
Challenger
Book value of D = 450,000 7(37,500) = $187,500
CL from sale of D = BV7 Market value = $137,500
Tax savings from CL, year 0 = 137,500(0.32) = $44,000
Challenger annual SL depreciation = $65,000
Annual tax saving = (65,000 +150,000)(0.32) = $68,800
AWC = $-184,827
Select the defender. Decision was incorrect.
Chapter 17
17.54
Succession options
Option
1
2
3
Defender
AWD1 = $300,000
Defender
2 years
1
0
Challenger
1 year
2
3
AWD2 = $240,000
Challenger
No tax effect if defender is cancelled. Calculate CFAT for 1, 2, and 3 years of
ownership. Tax rate is 35%.
Year 1:
Year 2:
Year 3:
TI = 120,000 266,640 + 66,640 = $320,000
TI = 120,000 355,600 + 222,240 = $253,360
TI = 120,000 118,480 + 140,720 = $97,760
Year 1: CFAT = 120,000 + 600,000 (112,000) = $592,000
Year 2: CFAT = -120,000 + 400,000 (-88,676) = $368,676
Year 3: CFAT = -120,000 + 200,000 (-34,216) = $114,216
AWC1 = $ 288,000
AWC2 = $+24,696
AWC3 = $+51,740
Selection of best option: Replace now with the challenger.
Year
Option
1
2
3
AW___
1
$240,000
$240,000
$288,000
$254,493
2
300,000
24,696
24,696
94,000
3
51,740
51,740
51,740
+ 51,740
17.57 (a) Before taxes: Let RV = 0 to start and establish CFAT column and AW of CFAT
series. If tax rate is 0%, RV = $415,668.
Chapter 17
17.60 (a) Take TI, taxes and D from Example 17.3. Use i = 0.10 and Te = 0.35.
Chapter 17
Chapter 17
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