## Solutions to Rockafeller Music Company

### Integrative Capital Budgeting Problem

 Year Item 0 1 2 3 4 5 Buy and sell the building -\$1,000,000 +\$800,000 Buy and sell the equipment -500,000 +150,000 Tax on the sale of the building -20,000 Tax on the sale of the equipment +40,000 Change in working capital -100,000 +100,000 Acquisition and disposiiton cash flows -\$1,600,000 +\$1,070,000 Change in revenues \$400,000 \$400,000 \$400,000 \$400,000 \$400,000 Change in expenses 160,000 160,000 160,000 160,000 160,000 Change in depreciation 100,000 100,000 100,000 100,000 100,000 Change in taxable income \$140,000 \$140,000 \$140,000 \$140,000 \$140,000 Change in taxes 56,000 56,000 56,000 56,000 56,000 Change in income after taxes \$84,000 \$84,000 \$84,000 \$84,000 \$84,000 Add: Change in depreciation 100,000 100,000 100,000 100,000 100,000 Change in operating cash flow +\$184,000 +\$184,000 +\$184,000 +\$184,000 +\$184,000 Change in net cash flow -\$1,600,000 +\$184,000 +\$184,000 +\$184,000 +\$184,000 +\$1,254,000 PV of cash flow -\$1,600,000 +\$167,273 +\$152,066 +\$138,242 +\$125,674 +\$778,635

Net present value = -\$238,109

Internal rate of return = 5.573%

Notes:

1. Depreciation
1. Depreciation on building = \$1,000,000 / 20 = \$50,000
2. Depreciation on equipment = \$500,000 / 10 = \$50,000
2. Book values
1. Book value of building = \$1,000,000 - (5 x 50,000) = \$750,000
2. Book value of equipment = \$500,000 - (5 x 50,000) = \$250,000
3. Tax on sales of property and equipment
1. Tax on sale of building = 0.40 (\$800,000 - 750,000) = \$20,000
2. Tax on sale of equipment = 0.40 (\$150,000 - 250,000) = -\$40,000