Chapter 11 Homework

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School

St. Petersburg College *

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3403

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Finance

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Feb 20, 2024

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docx

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Uploaded by ColonelMorning9825

Calculating initial cash flow DuPree Coffee Roasters, Inc., wishes to expand and modernize its facilities. The installed cost of a proposed computer-controlled automatic-feed roaster will be $120,000. The firm has a chance to sell its 3-year-old roaster for $35,700. The existing roaster originally cost $60,900 and was being depreciated using MACRS and a 7-year recovery period . DuPree is subject to a 21% tax rate. a. What is the book value of the existing roaster? b. Calculate the after-tax proceeds of the sale of the existing roaster. c. Calculate the change in net working capital using the following figures: Anticipated Changes in Current Assets and Current Liabilities Accruals -$20,400 Inventory +50,500 Accounts payable +40,200 Accounts receivable +70,900 Cash 0 Notes payable +15,100 d. Calculate the initial cash flow associated with the proposed new roaster.

Operating cash flows Richard and Linda Thomson operate a local lawn maintenance service for commercial and residential property. They have been using a John Deere riding mower for the past several years and believe that it is time to buy a new one. They would like to know the operating cash flows associated with the replacement of the old riding mower. The following data are available. 1. There are 5 years of remaining useful life on the old mower. 2. The old mower has a zero book value. 3. The new mower is expected to last 5 years. 4. The Thomsons will follow a 5-year MACRS recovery period for the new mower. 5. Depreciable value of the new lawn mower is $1,830. 6. They are subject to a 32% tax rate. 7. The new mower is expected to be more fuel-efficient, maneuverable, and durable than the previous models and can result in reduced operating expenses of $489 per year. 8. The Thomsons will buy a maintenance contract that calls for annual payments of $123. Create an operating cash flow statement for the replacement of Richard and Linda's John Deere riding mower. Show the operating cash flow for the next 6 years.

Terminal cash flow: Various lives and sale prices Looner Industries is currently analyzing the purchase of a new machine that costs $165,000 and requires $20,300 in installation costs. Purchase of this machine is expected to result in an increase in net working capital of $29,800 to support the expanded level of operations. The firm plans to depreciate the machine under MACRS using a five-year recovery period and expects to sell the machine to net $9,500 before taxes at the end of its usable life. The firm is subject to a 21 % tax rate. a. Calculate the terminal cash flow for a usable life of (1) three years, (2) five years, and (3) seven years. b. Discuss the effect of usable life on terminal cash flows using your findings in part a. c. Assuming a five-year usable life, calculate the terminal cash flow if the machine were sold to net (1) $9,265 or (2) $169,800 (before taxes) at the end of five years. d. Discuss the effect of sale price on terminal cash flow using your findings in part c.

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Terminal cash flow: Various lives and sale prices Looner Industries is currently analyzing the purchase of a new machine that costs $156,000 and requires $20,300 in installation costs. Purchase of this machine is expected to result in an increase in net working capital of $30,500 to support the expanded level of operations. The firm plans to depreciate the machine under MACRS using a five-year recovery period and expects to sell the machine to net $9,700 before taxes at the end of its usable life. The firm is subject to a 21% tax rate. a. Calculate the terminal cash flow for a usable life of (1) three years, (2) five years, and (3) seven years. b. Discuss the effect of usable life on terminal cash flows using your findings in part a. c. Assuming a five-year usable life, calculate the terminal cash flow if the machine were sold to net (1) $8,815 or (2) $170,100 (before taxes) at the end of five years. d. Discuss the effect of sale price on terminal cash flow using your findings in part c.

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Integrative: Complete Investment decision Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.19 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $0.94 million 10 years ago, and can be sold currently for $1.27 million before taxes. As a result of acquisition of the new press, sales in each of the next 5 years are expected to be $1.65 million higher than with the existing press, but product costs (excluding depreciation) will represent 47% of sales. The new press will not affect the firm's net working capital requirements. The new press will be depreciated under MACRS using a five-year recovery period. The firm is subject to a 40 % tax rate. Wells Printing's cost of capital is 10.9%. (Note: Assume that the old and the new presses will each have a terminal value of $0 at the end of year 6.) a. Determine the initial cash flow required by the new press. b. Determine the periodic cash inflows attributable to the new press. (Note: Be sure to consider the depreciation in year 6.) c. Determine the payback period. d. Determine the net present value (NPV) and the internal rate of return (IRR) related to the proposed new press. e. Make a recommendation to accept or reject the new press, and justify your answer.