# Standard Deviation and Cash Flow

1680 Words Mar 12th, 2013 7 Pages
Chapter 12 Problems

1. Cash flow (LO2) Assume a corporation has earnings before depreciation and taxes of \$100,000, depreciation of \$50,000, and that it has a 30 percent tax bracket. Compute its cash flow using the format below.

Earnings before depreciation and taxes _____ Depreciation _____ Earnings before taxes _____ Taxes @ 30% _____ Earnings after taxes _____ Depreciation _____

12-1. Solution:

Earnings before depreciation and taxes \$100,000 Depreciation – 50,000 Earnings before taxes 50,000 Taxes @ 30% 15,000 Earnings after taxes 35,000 Depreciation +
12-6. Solution:

Payback for Product X Payback for Product Y

\$200,000 – 60,000 1 year \$200,000 – 40,000 1 Year 140,000 – 90,000 2 years 160,000 – 70,000 2 years 50,000 – 50,000 3 years 90,000 – 80,000 3 years 10,000/20,000 .5 years

Payback Product X = 3.00 years

Payback Product Y =3.50 years

Product X would be selected because of the faster payback.

7. Payback method (LO3) Assume a \$50,000 investment and the following cash flows for two alternatives.

|Year |Investment A |Investment B |
|1 |\$10,000 |\$20,000 |
|2 |11,000 |25,000 |
|3 |13,000 |15,000 |
|4 |16,000 |— |
|5 |30,000 |— |

Which alternative would you select under the payback method?

12-7. Solution:

Payback for Investment A Payback for Investment B

\$50,000 –\$10,000 1 year \$50,000 – \$20,000 1 year 40,000 – 11,000 2 years 30,000 – 25,000 2 years 29,000 –