A B 0 1 C D 2 29 PROBLEM 2 30 Inputs 31 Revenues 32 Revenue Inflation Rate 33 Expenses 34 Expense Inflation Rate 35 Cost of New Asset 36 Useful life 37 Operating Cash Flows, Old Asset 38 39 Outputs 40 Revenues 41 Operating Expenses 42 Depreciation Expense 43 Earnings Before Taxes 44 Taxes 45 Net Income 46 Depreciation Expense 47 Operating Cash Flow 48 Operating Cash Flow, Old Asset 49 Net Operating Cash Flows 50 E 3 50 A Timing CuGH 1 10 WO 51 PROBLEM 3 52 Inputs 53 Asset Purchased in Year 0 54 Book Value 55 Proceeds on Sale 56 Initial Purchase Price 57 58 Outputs 59 Cash Distribution Table 60 Book Value 61 Capital Gain 62 Capital Loss 63 Recaptured Depreciation 64 Proceeds on Sale 65 66 Proceeds on Sale of Asset Purchased in Year 0 67 Taxes on Proceeds on Sale 68 Increase in Working Capital 69 Terminal Cash Flow 70 B C D E F Distribution Tax Effects 71 PROBLEM 4 72 Cost of Capital 73 Cash Flows 74 IRR 75 76 PROBLEM 5 77 78 A B C D E F 0 1 2 3 Capital gains tax rate 0.15 Income tax rate 0.30 1. 2. 3. Straight line depreciation A firm is considering purchasing a new asset. Use the information in the chart below to find the net cash outlay for this asset. 0 Cost of New Asset 125,000 Installation Costs 0 Old Asset Book Value 0 Proceeds on Sale 32,000 Initial Purchase Price 100,000 Decrease in Working Capital 7,000 The firm is projecting the cash flows in the chart below for the asset above. Find the marginal operating cash flows for this asset. Year 0 1 2 3 Revenues 138,000 Revenue Inflation Rate 9.00% 9.00% Expenses 44,000 Expense Inflation Rate 5.00% 5.00% Useful life 3 Operating Cash Flows, Old Asset 47,000 47,000 47,000 At the end of Year 3, the asset purchased in Year 0 will be sold for $20,000. Find the terminal cash flow. 4. What is this project's IRR? 5. If the firm's cost of capital is 11%, should the firm invest in this asset? Justify your answer.