Capital Budgeting: TNOCF & Effect of Fcinv Increase

CFA Level II
#1

CFA text pg 35. In the problem set it asks to calc TNOCF for a replacement project. The formula is given as Sal t - (Sal t - BV t)(tax rate) +NWC. Problem I am running into is how they are arriving at $150,000.

(sal new 200 - sal old 100) + NWC 80 - Tax 0.30 is how its given. i might be slow but order of operations give me a different answer.

I am running into the same problem on pg 83 question 46. Can someone provide a clear and concise formula. I know this isnt that difficult.

Lastly,pg 83 question 47 the calulation they give when asking about the affect of an increase on NPV when FCInv or outlay is increased: additional tax savings from the additional depreciation ect. Problem again is the math.

Outlay increase -250 + annual deprec 50(0.40 tax)/1+ discount rate = -250 + 72 = -177.9 decrease in NPV. No idea how they are deriving the 72. How do you get that number when you are disounting a lower absolute #?

Thanks

#2

It’s just (200-100) - 0.3(200-100)+80 = 150

what are you doing or getting? Is you calculator set to AOS?

#3

For question 47 on page 83, the 72 comes from discounting the tax shield of 20 over the 5 years. Additional 50 dep (.40 tax) reduces taxes by 20 per year. This 20 per year needs to be discounted 5 years out, then added to the additional FCInv (-250).

#4

thanks for the clarification. formula was incorrect!

#5

thanks for responsing. i understand how to calc the tax shield. Im just not understanding how you arive at a higher number if you are discounting 20,000/1.12^5yrs this gives me ~17,000.

#6

ignore that im retarted. threw it in the cashflow function in the TAII. All good.

#7

thanks for the help guys.