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
Related questions
Question
![Mayco, Inc would like to set up anew plant (expand).
Current ly, Mayco hai an
Cost of
option to buy
$24,000-Necessary equipment for the plant will cost $16,000,
existing building at a
an
including installation coits. The eguipment falls into a MACRS 5-year
class. The builoling falls into a MACRS 39-years class. The project
would also require on initial investment of $12,00 in net working
capital. The initial working capital învectment will be made at
the time of the purchase of the building and equipmente
project's estimated
that time, the building is expected to have a market Value
of $15,000 and a book Value of $21,816,whereas the equipment
is expected to hare a market value of $4,000 and a book
value of $2,720. Annual sales will be $ 80,000.The
production depatment has estimated that variable manufacturiog
costs will to tal 60% of sales and that fixed overhead
costs, excluding depieciation, will be $10,000 ayear [costs:
(0.60)80.000*10,000= 58,000]. Depreciation expense will be
determined fox the 4ear in acordance with the MACRSXate
economic life is fou years, At the end of
Mayco's manginal federal-pluc-state tan date is 4o its cost
of capital is 12%, and foo capital budgeting purposel,
the
company's policy is to assume that operating cash flows ocCux
at the end of each
The plant will begin opesations.
year.
immediately after the investment is made, and the fixst
operating Cash flows will occur exactly one year later.
The MACRS toble is given belaw.
Vear
Proper ty classes
Five- Year
Three-Year
Seven-Year
33.33%
44.44%
20-00%.
14.29%
32.00
24-49
14-82%
19.20
11.52
11.52
17.49
7.41
12-49
8.93
6.
5.76
8.93
7
8.
8.93
4=45
3) Compute the teminal year cash flows fox Magco's
expansion project. Also provide explanation of wosking-
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Transcribed Image Text:Mayco, Inc would like to set up anew plant (expand).
Current ly, Mayco hai an
Cost of
option to buy
$24,000-Necessary equipment for the plant will cost $16,000,
existing building at a
an
including installation coits. The eguipment falls into a MACRS 5-year
class. The builoling falls into a MACRS 39-years class. The project
would also require on initial investment of $12,00 in net working
capital. The initial working capital învectment will be made at
the time of the purchase of the building and equipmente
project's estimated
that time, the building is expected to have a market Value
of $15,000 and a book Value of $21,816,whereas the equipment
is expected to hare a market value of $4,000 and a book
value of $2,720. Annual sales will be $ 80,000.The
production depatment has estimated that variable manufacturiog
costs will to tal 60% of sales and that fixed overhead
costs, excluding depieciation, will be $10,000 ayear [costs:
(0.60)80.000*10,000= 58,000]. Depreciation expense will be
determined fox the 4ear in acordance with the MACRSXate
economic life is fou years, At the end of
Mayco's manginal federal-pluc-state tan date is 4o its cost
of capital is 12%, and foo capital budgeting purposel,
the
company's policy is to assume that operating cash flows ocCux
at the end of each
The plant will begin opesations.
year.
immediately after the investment is made, and the fixst
operating Cash flows will occur exactly one year later.
The MACRS toble is given belaw.
Vear
Proper ty classes
Five- Year
Three-Year
Seven-Year
33.33%
44.44%
20-00%.
14.29%
32.00
24-49
14-82%
19.20
11.52
11.52
17.49
7.41
12-49
8.93
6.
5.76
8.93
7
8.
8.93
4=45
3) Compute the teminal year cash flows fox Magco's
expansion project. Also provide explanation of wosking-
12345
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