Q21 R21: Selling price required for specific IRR

CFA Level II Corporate Finance
#1

[question removed by moderator]

My Q : How/why does the 500k get removed from the left hand side of the equation? In my opinion the calculation should go as follows:

500,000 - 363,006.5=Sal3−0.30(Sal3−380,000)/1.15^3

and so on…

#2

You made a small mistake…you are subtracting the sum of the three 60,000s which is 136,993.50 and subtract that from 500,000, which then gives you the 365,006.

#3

I find their computation of after-tax operating cash flow a bit strange. The formula is:

CF=(S-C)(1-t)+TD

Any idea why we are not multiplying the depreciation with the tax rate here?

#4

We’re given operating income after tax so it’s already taken care of:

CF=(S-C-D)(1-t) + D

CF=20k + 40k

#5

Thank you for pointing that out Tartaglia!

And the depreciation is added back because its a non-cash flow and the NPV is calculated based on cash flows.

Hope this answers your question.

#6

Thank you justme, that answered the question.

Thank you Matt, but my question was related to why we are not multiplying the depreciation with the tax rate when adding it back (as in the formula). But as justme pointed out, that part is already taken care of, since we are given the operating income after tax. So now just have to add back the D not the TD.