Mock AM Corporate Finance-Earl Case

CFA Level II Corporate Finance
#1

By how much is the NPV differing for straight line depreciation and accelerated deoreciation, if the EBITs are as follows:

Year 1: 60,000,

Year2: 66,000

Year3: 75.000

Year4:87,000

Year5:102,000

Depreciation is 30,000 in all years and tax is 40%, initial outlay 185,000, annual discount rate 10%

Accelerated Depreciation:

EBIT:Year1: 40,005 Depreciation: 49995

Year2:29,325 66,675

Year3:82,785 22,215

Year4: 105885 11,115

Year5:132000 0 tax rate, initial outlay and discount rate same as before

#2
  1. Making sure you are adding back the working capital to the last cash flow?

Op Income * (1-T) + Depreciation for each period

Last period Op Income * (1-T) + Depreciaton + Increase in CA - Increase in CL

NPV that bad boy and you get 123,373

#3

Alternatively you could figure this one out by just taking the difference in depreciation per year, multiplying it by the tax rate and taking the NPV of those values.

#4

thank you…:slight_smile:

#5

Hi Yayywork, I got stuck in the same concept, but in a different question (Earl case’s first question). So far, I knew that operating CF = after tax savings + depreciation shield. So I thought that operating CF for the first year would be: 60,000*(1-0.4) + 30,000*0.4 = 48,00 (right answer = 66). Am I mixing things up and I must always add to the after tax savings the whole depreciation? Thank you!!