Replacement project Q - Book 7, exam 1 pm, #85

CFA Level II
#1

For this Q, they provide an existing project and replacement project, and info for sales, expenses, depreciation, and salvage value for both. Then they want the end of project CF, which should be comprised of the changes in each of the accounts above, plus salvage value, minus the tax on the cap gain on the asset sale. If anyone is familar with the Q, why do they take the differences b/w salvage values (new and old) to come up with a Cash flow? Shouldn’t the original projects salvage value Cash flow be taken at the initial outlay?

#2

i have the same question. made no sense to me.

#3

This should help, it helped me big time: http://www.analystforum.com/phorums/read.php?12,978316

#4

anybody?

#5

same here, caught me off guard when in the answer they used expected salvage value at termination (113-90)*.6=13,800. Anyone agree this is wrong?

#6

Because a replacement project is different that a “new” project - it’s the difference between the two projects, not like starting fresh as in the other version (whose name escapes me right now). Don’t forget that your depreciation is calculated as the difference between the old and the new project.

#7

but even then you take the salvage value of the replacement machine as an inflow. and the salvage value of the new machine as a terminal value. you do not have the terminal value also being affected by the Salvage value of the old machine that was replaced.

#8

Okay, so the name that escaped me was “expansion” (dar dee dar), and on the Quicksheet, it says that replacement is the same as expansion, except: 1) current after-tax salvage of old assets reduces initial outlay 2) incremental depreciation is the change in deprecation I’m like Jesus.

#9

so basically the answer sheet was wrong in taking out the expected salvage value? Should the actual answer to the terminal CF be (113*.6) + (86.7) + 115?

#10

I’m not familiar with the question, so without someone posting the question and the answer, I’m going to go back into the conference room and resume making notecards.

#11

Replacement project: Current machinery book value 120,000, market value 195,000 New machine: 332,000 + 115,000 in net working capital Existing Equipment Tera Project Annual Sales 523,000 708,000 Cash Oper Exp 352,000 440,000 Annual Dep 40,000 110,667 Accouting Salv 0 0 Exp Salv 90,000 113,000 Tax Rate is 40%

#12

anyone else?

#13

If someone else says it’s wrong (with that someone else being cpk), then I’ll bite. Other than that, I have no energy to go through this problem right now, sorry dude.