1. Capital Budgeting Argo Airlines is looking to buy some gates at a West Coast airport. The key financial variables are below. Note that the gates revert back to the airport at the end of year 10. Note that any losses trigger tax benefits. Purchase Price Yearly Revenue Operating Costs Discount Rate Gate Renovation (Fit-out Costs) Revenue Inflator Tax Rate $31M $15M 51% of revenue 6% $3M (in year 5) 2.0% 21% What are the NPV and IRR of the gates? Should Argo invest in them? Why or why not?

1. Capital Budgeting Argo Airlines is looking to buy some gates at a West Coast airport. The key financial variables are below. Note that the gates revert back to the airport at the end of year 10. Note that any losses trigger tax benefits. Purchase Price Yearly Revenue Operating Costs Discount Rate Gate Renovation (Fit-out Costs) Revenue Inflator Tax Rate $31M $15M 51% of revenue 6% $3M (in year 5) 2.0% 21% What are the NPV and IRR of the gates? Should Argo invest in them? Why or why not?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Romanos Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $5,000,000 for the year. Laura Berenstein, staff analyst at Romanos, is preparing an analysis of the three projects under consideration by Chester Romanos, the company's owner. Data Table A B C D 1 Project A Project B Project C 2 Projected cash outflow 3 Net initial investment $3,000,000 $2,100,000 $3,000,000 4 Projected cash inflows 5 Year 1 $1,200,000 $1,200,000 $1,700,000 6 Year 2 1,200,000 600,000 1,700,000 7 Year 3 1,200,000 500,000 200,000 8 Year 4 1,200,000 100,000 9 Required rate of return 10% 10% 10% 1. Because the company's cash is limited, Romanos thinks the payback method should be used to choose between the capital budgeting projects. a. What are the…
Star City is considering an investment in the community center that is expected to return the following cash flows: Use Exhibit A.8. Year Net Cash Flow 1234in 5 $ 28,000 58,000 88,000 88,000 108,000 This schedule includes all cash inflows from the project, which will also require an immediate $208,000 cash outlay. The city is tax-exempt; therefore, taxes need not be considered. Required: a. What is the net present value of the project if the appropriate discount rate is 22 percent? (Round PV factor to 3 decimal places. Negative amount should be indicated by a minus sign.) Net present value
Straightforward Capital Budgeting with Taxes (Non-MACRS-Based Depreciation); SensitivityAnalysis Dorothy & George Company is planning to acquire a new machine at a total cost of $30,600.The machine’s estimated life is 6 years and its estimated salvage value is $600. The company estimatesthat annual cash savings from using this machine will be $8,000. The company’s after-tax cost of capitalis 8%, and its income tax rate is 40%. The company uses straight-line depreciation (non-MACRS-based).Required1. What is this investment’s net after-tax annual cash inflow, rounded to nearest whole dollar?2. Assume that the net after-tax annual cash inflow of this investment is $5,000; what is the paybackperiod in years, rounded to 2 decimal places (e.g., 4.418 years = 4.42 years)?3. Assume that the net after-tax annual cash inflow of this investment is $5,000; what is the net present value(NPV) of this investment? Use the built-in NPV function; round your final answer to nearest whole dollar. 4.…
roject Cash Flow The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service: Projected sales $24 million Operating costs (not including depreciation) $13 million Depreciation $5 million Interest expense $4 million The company faces a 25% tax rate. What is the project's operating cash flow for the first year (t = 1)? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Round your answer to the nearest dollar. $
Project Cash Flow The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of it new proposed service: Projected sales Ⓡ Operating costs (not including depreciation) 24 million 13 million. Depreciation $6 million Interest expense $ 3 million. The company faces a 25% tax rate. What is the project's cash flow for the first year (t = 1)? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Round your answer to the nearest dollar.
Cash flows estimation and capital budgeting:You are the head of finance department in XYZ Company. You are considering adding a new machine to your production facility. The new machine’s base price is $10,800.00, and it would cost another $2,760.00 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after three years for $2,350.00. The machine would require an increase in net working capital (inventory) of $800.00. The new machine would not change revenues, but it is expected to save the firm $23,845.00 per year in before-tax operating costs, mainly labor. XYZ's marginal tax rate is 35.00%. a. What is the initial cash outlay? b. What is the free cash flow for year 1? c. What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital – also called terminal value)? (please show your work in details and highlight your answers)
Project Cash Flow The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service: Projected sales $22 million Operating costs (not including depreciation) $12 million Depreciation $6 million Interest expense $3 million The company faces a 25% tax rate. What is the project's operating cash flow for the first year (t = 1)? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Round your answer to the nearest dollar.
Project Cash Flow The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service: Projected sales $20 million Operating costs (not including depreciation) $9 million Depreciation $6 million Interest expense $3 million The company faces a 25% tax rate. What is the project's operating cash flow for the first year (t = 1)? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Round your answer to the nearest dollar. $
Basic Capital Budgeting Techniques; No Taxes, Uniform Net Cash Inflows; SpreadsheetsBob Jensen Inc. purchased a $650,000 machine to manufacture specialty taps for electrical equipment.Jensen expects to sell all it can manufacture in the next 10 years. To encourage capital investments,the government has exempted taxes on profits from new investments. This legislation is tobe in effect for the foreseeable future. The machine is expected to have a 10-year useful life with nosalvage value. Jensen uses straight-line depreciation. The net cash inflow is expected to be $150,000each year for 10 years. Jensen uses a 12% discount rate in evaluating capital investments. Assume,for simplicity, that MACRS depreciation rules do not apply. how to find ARR?
he cash flows associated with a public works project in Buffalo, New York, are shown. Use the modified B/C ratio at a discount rate of 5% per year to determine the economic justification. First cost, $ 30,000,000 AW of benefits, $/year 7,700,000 AW of disbenefits, $/year 1,700,000 M&O costs, $/year 1,525,000 Life of project, years 30 The modified B/C ratio is . The project is economically (Click to select) justified not justified .
Boston Cola is considering the purchase of a special-purpose bottling machine for $35,000. It is expected to have a useful life of 4 years with no terminal disposal value. The plant manager estimates the following savings in cash operating costs: Boston Cola uses a required rate of return of 14% in its capital budgeting decisions. Ignore income taxes in your analysis. Assume all cash flows occur at year-end except for initial investment amounts. Data Table Year Amount Year 1 $15,000 Year 2 11,000 Year 3 10,000 Year 4 8,000 Total $44,000 (Use factor amounts rounded to three decimal places. Round your answers to the nearest whole dollar. Use a minus sign or parentheses for a negative net present value.) Calculate the following for the special purpose bottling machine: 1. Net present value 2. Payback period 3. Discounted payback period 4. Internal rate of return (using the interpolation method) 5. Accrual…
2. Calculating Project NPV The Fleming Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 22 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Investment Sales revenue Operating costs Depreciation Net working capital spending Year 0 $32,800 450 Year 1 Year 2 Year 3 Year 4 $14,200 2,100 8,200 175 $15,900 $15,700 2,100 2,100 8,200 8,200 250 275 $12,900 2,100 8,200 ? a. Compute the incremental net income of the investment for each year. b. Compute the incremental cash flows of the investment for each year. c. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?

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