A company is developing a new product. The development of the product requires an initial investment of $130,000 with further investments of $70,000 in year 1, $50,000 in year 2 and $15,000 in year 3. The company will launch the product on the market in year 3 and the company expects annual profits of $40,000 from year 3 to year 8. At the end of year 8, the company expects to terminate the production line and sell it to a competitor for $80,000. The company's required rate of return is 8%. a. Calculate the NPV for this product. Round to the nearest cent b. Should the company proceed with developing the product? Yes No

A company is developing a new product. The development of the product requires an initial investment of $130,000 with further investments of $70,000 in year 1, $50,000 in year 2 and $15,000 in year 3. The company will launch the product on the market in year 3 and the company expects annual profits of $40,000 from year 3 to year 8. At the end of year 8, the company expects to terminate the production line and sell it to a competitor for $80,000. The company's required rate of return is 8%. a. Calculate the NPV for this product. Round to the nearest cent b. Should the company proceed with developing the product? Yes No

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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B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $360,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 144,000 units of the equipment’s product each year. The expected annual income related to this equipment follows. Compute the (1) payback period and (2) accounting rate of return for this equipment.
Halloween, Incorporated, is considering a new product launch. The firm expects to have an annual operating cash flow of $9.2 million for the next 8 years. The discount rate for this project is 13 percent for new product launches. The initial investment is $39.2 million. Assume that the project has no salvage value at the end of its economic life. a. What is the NPV of the new product? (Do not round intermediate calculations and After the first year, the project can be dismantled and sold for $26.2 million. If the estimates of remaining cash flows are revised based on the first year’s experience, at what level of expected cash flows does it make sense to abandon the project?
A company is developing a new product. The development of the product requires an initial investment of $150,000 with further investments of $70,000 in year 1, $40,000 in year 2 and $20,000 in year 3. The company will launch the product on the market in year 3 and the company expects annual profits of $40,000 from year 3 to year 8. At the end of year 8, the company expects to terminate the production line and sell it to a competitor for $70,000. The company's required rate of return is 7%. a. Calculate the NPV for this product. -$37,562.00 8) Round to the nearest cent b. Should the company proceed with developing the product?
JBL Co. has designed a new conveyor system. Management must choose among three alternative courses of action: (1) The firm can sell the design outright to another corporation with payment over 2 years. (2) It can license the design to another manufacturer for a period of 5 years, its likely product life. (3) It can manufacture and market the system itself; this alternative will result in 6 years of cash inflows. The company has a cost of capital of 11.4%.Cash flows associated with each alternative are as shown in the following table. Alternative Sell License Manufacture Initial investment (CF0) $199,000 $200,600 $449,000 Year (t ) Cash inflows (CFt) 1 $199,500 $250,600 $200,300 2 250,400 100,700 255,000 3 — 79,700 200,300 4 — 59,700 200,300 5 — 40,500 200,300 6 — —…
The management Biden ltd intends to replace it existing two-year-old milk scheming machine whose original cost wash. 1000,000. The machine is two years old and it has a current market value of sh 700,000. The capital budgeting analysts believe that the machine has five more years of useful life. At the end of the five years, the asset will have a zero-salvage value. The netbook value of the machine is sh 800,000. The management is contemplating the purchase of a new machine to replace the old one. The new machine costs sh 1,600,000 and installation estimated at sh 300,000. It has an estimated salvage value of shs. 200,000 at the end of five-year useful life. The new machine will have a greater technological capacity and therefore annual sales are expected to increase by sh 240,000 operating efficiencies with the new machine will produce an expected savings of shs 260,000 a year. The company uses modified accelerated capital recovery depreciation method of 23% ,17%,20% ,21% and 19% from…
The Candida Company wants to purchase a new machine for its factory operations at a cost of $475,000. The investment is expected to generate $175,000 in annual cash flows for a period of four years. The required rate of return is 14%. The old machine can be sold for $25,000. The machine is expected to have zero value at the end of the four-year period. Required: What is the net present value of the investment? Would the company want to purchase the new machine? Income taxes are not considered. a. $509,775; yes b. $34,775; no c. $59,775; yes d. $163,375; no
Cirice Corporation is considering opening a branch in another state. The operating cash flow will be $ 150, 400 a year. The project will require new equipment costing $592, 000 that would be depreciated on a straight-line basis to zero over the 6-year life of the project. The equipment will have a market value of $ 177,000 at the end of the project. The project requires an initial investment of $41,000 in net working capital, which will be recovered at the end of the project. The tax rate is 23 percent. What is the project's IRR? Multiple Choice 12.33% 17.06% 15.99% 15.67% 14.74%
Lululemon wants to enter the electric car business. To enter the business, Lululemon will need to make an initial investment of $100 million into purchases of production facilities and equipment. The production facilities and equipment are expected to have a ten-year life and will be depreciated on a straight-line basis over that period, so that the book value of the production facilities and equipment equals zero at the end of year ten. Lululemon plans to operate the business only for six years, after which Lululemon plans to sell its production facilities and equipment for $60 million. For the six years that Lululemon expects to operate in the electric car business,Lululemon expects to generate cash revenues of $140 million in the first year, which Lululemon expects to grow at a rate of 5% each year after the first year. The cash operating costs of running the electric car business, excluding depreciation expenses, are expected to be 35% of revenues. Lululemon expects an increase in…
Holmes Manufacturing is considering a new machine that costs $290,000 and would reduce pretax manufacturing costs by $90,000 annually. The new machine will be fully depreciated at the time of purchase. Management thinks the machine would have a value of $24,000 at the end of its 5-year operating life. Net operating working capital would increase by $28,000 initially, but it would be recovered at the end of the project's 5-year life. Holmes's marginal tax rate is 25%, and a 13% WACC is appropriate for the project. a. Calculate the project's NPV. Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest cent. $ Calculate the project's IRR. Do not round intermediate calculations. Round your answer to two decimal places. % Calculate the project's MIRR. Do not round intermediate calculations. Round your answer to two decimal places. % Calculate the project's payback. Do not round intermediate calculations. Round…
America Inc., is considering the addition of a new maintenance services division. Opening the division will require a new building, staff, and equipment. The proposed plan involves purchasing land that is currently selling for $750,000. The price of constructing the building on this land is $4.5 million and should be finished before operations begin in year 1. The building will be depreciated straight-line to a book value of $500,000 over 20 years. New equipment will cost $200,000 upfront, and will be depreciated straight line to zero over 4 years. An HR team will need to be brought on for hiring new staff. They estimate that the upfront cost of hiring will be $210,000. In addition, a sales forecast has already been formed for the project and the incurred fee for this service is $90,000. The team forecasts sales of $900,000, $800,000, $600,000, and $300,000 for years 1 through 4 respectively. In each year, inventory equal to one tenth of the current year’s revenue will be required.…
Moose Pastures Inc. is considering a seven-year project to improve its production efficiency. Buying a new assembly machine for $708, 000 is estimated to result in $213,000 in annual pre-tax cash flows. The machine has a CCA rate of 30% per year, and it will have a salvage value of $70,000 at the end of the project. The machine also requires an initial investment in inventory of $20, 000 (in year zero), which will be recovered at the end of the project (in year 7). If the tax rate is 40% and the discount rate is 10%, what is the NPV of the machine purchase? (Assume the CCA pool remains open and that there are no capital gains/losses.) Correct answer is $132, 337. (My question) Hi I am confused on how it got 132, 337. I know there's a formula but can you walk me through the steps to get this correct answer?

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