A family that runs a family business by selling all kinds of arts and crafts products, is trying to analyze the profitability of its new business idea. They are thinking of designing and selling cuckoo clocks, a project that the family would be running for 7 years. Buying all the necessary production equipment upfront would cost the family $1,100. It is hoping that it would be able to generate $700 in annual profits, after taxes. The appropriate discount rate for this project is 9%. Obviously, the profitability of this new project greatly depends on the family correctly estimating the annual sales of the cuckoo clocks! Calculations can show that if the annual after-tax profits turn out to be $200 higher than the family's original estimate, then the estimated Net Present Value of the project will increase by 32.32 %.

A family that runs a family business by selling all kinds of arts and crafts products, is trying to analyze the profitability of its new business idea. They are thinking of designing and selling cuckoo clocks, a project that the family would be running for 7 years. Buying all the necessary production equipment upfront would cost the family $1,100. It is hoping that it would be able to generate $700 in annual profits, after taxes. The appropriate discount rate for this project is 9%. Obviously, the profitability of this new project greatly depends on the family correctly estimating the annual sales of the cuckoo clocks! Calculations can show that if the annual after-tax profits turn out to be $200 higher than the family's original estimate, then the estimated Net Present Value of the project will increase by 32.32 %.

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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Robert Jones and his wife Suzie recently opened an investment account with the intention of saving enough to purchase the house of their dreams, a beautiful, little white house on the corner of Michigan Avenue and Maple Street. Their goal is to have $45,000 down in five years. Their account will guarantee them a return of 8% compounded annually. How much do they need to put into the account right now to reach their objective? $46,778.96 $39,546.09 $51,214.75 $30,626.24
You want to start an organic garlic farm. The farm costs $210,000, to be paid in full immediately. Year 1 cash inflow will be $25,000, after which the inflows are expected to grow at a 5% annual rate until the end of year 5 when you anticipate selling the farm for $260,000 (at the end of year 5 you get both the cash inflow from operations and from selling the farm). What is the IRR of your garlic farm investment? Round to the tenth of a percent (e.g. 5.6%=5.6). [Hint: You'll want to solve this in Excel using the IRR function or Goal Seek. Make sure the IRR cell is set to show decimals.]
You are the owner of a small bar, The World, and you are considering opening a bakery in a vacant area in the back of the store. You estimate that it will cost you $52,175.00 to set up the bakery and that you will generate $10,758.00 in after-tax cash flows in for the life of the store (which is expected to be 10 years.) The one concern you have is that you have limited parking; by opening the bakery you run the risk of not having enough parking for customers who enjoy your bar. You estimate that the lost sales would amount to $3,230.00 per year and that your after-tax operating margin on sales at the bar is 54.00%. If your discount rate is 14.00%, what is the NPV of opening the bakery?
2) Matt's Lemonade Stand is one of the most up and coming places to get lemonade in Amherst. I'm looking to take it public by splitting up the company into 100 shares and selling some of them. a) Suppose an inside source tells you that last summer the lemonade stand made $1,000. They expect the same for all summers in the foreseeable future. You assign a discount rate of 10% annually. What are you willing to pay for a single share given the information you've received from the inside source? (Assume throughout that the firm does not retain any of its earnings so that all earnings are paid to shareholders as dividends). b) Suppose instead that I claim the information about cashflow last summer was correct but I'm planning to expand to Northampton and Hadley so I think there will be 5% growth forever. Now what are you willing to pay for a share if your required rate of return does not change from 10%? c) You correctly point out that this growth will not be sustainable. Instead you think…
Assume you want to start your own small business. You like to open a bakery or nail salon. We assume that the set up cost is the same for both of them and you should invest 1000$. In terms of profit: if you open a bakery for the first year there is 35% chance that you earn 30% and 65% chance that you earn 15%. For the second year, there is 45% chance that you earn 50% and there is 55% chance that you earn 20%. If you open a nail salon, for the first year there is 25% chance that you 60% and 75% chance that you earn 40%. For the second year, there is 80% chance that you earn 30% and 20% chance that you earn 60%. Which business is a better investment that gives you the higher profit for your investment?
Blossom Skydiving Co. is owned by Nick and Amber. Business has been booming, as baby boomers want to prove their moxie, and the younger generations want to post crazy pictures on social media. So Nick and Amber are planning to purchase a second plane. Here are the specs: Purchase price $200,000 New cash operating costs per year 6,700 Additional gross margin in year 1 14,500 The owners would use this plane for 10 years, at which point they would sell it and try to replace it with a newer model. They estimate the salvage value to be $73,000 at that time. The company's tax rate is 20%. (a) Your answer is partially correct. Determine the ARR for Blossom Skydiving Co. for the first year with this new plane in service. (Round answer to 2 decimal places, e.g. 15.25%. Enter negative answers using either a negative sign preceding the number, e.g.-15.25% or parentheses, e.g. (15.25)%.) ARR -2.22% If just one year of income is considered for this purchase, will Nick and Amber move forward with…
You are evaluating a new project for Globex Corporation as the company is planning to launch a new and very efficient mobile device named Meta-5050. The new product is expected to run for 5 years. To produce this new product, Globex needs to purchase new equipment that will cost $750,000. The company needs to spend another $10,000 for shipping and installation. You estimate the sales price of Meta-5050 to be $650 per unit and sales volume to be 800 units in year 1; 1,400 units in years 2-4; and 500 units in year 5. The cost of the contents, packaging and shipping are expected to be $225 per unit and the annual fixed costs for this project are $150,000 per year. The equipment will be depreciated straight-line to zero over the 5-year project life. The actual market value (salvage value) of these assets at the end of year 5 is expected to be $35,000. If this project is taken up, inventory will increase by $72,000, accounts receivable will increase by $36,850, and accounts payable will…
A cooperative that makes value-added products like jams and jellies has voted to purchase a new machine to fill their jars. The machine costs $21,000 and has a investment life of 8 years. The IRS will allow them to depreciate it over 15 years. The marginal tax rate will be 18% over the next 9 years and the inflation rate will be 1.5%. The cooperative requires a 12% pre-tax rate of return and the risk premium is 3%. What is the present value of the tax savings from depreciation? Please select the correct one : $1,314 $1,216 $1,239 $1,261 None of the answers are correct
I am confused about the input on BAII+ calculator as we are learning like this. Can you clarify what should be the inputs and why?
A businessman bought a used building and found that the roof insulation was insufficient. He estimated that with 6 inches of foam insulation he could lower his heating bill by $25 a month and the cost of air conditioning by $20 a month. Assuming that the first six months of the year are winter and the next six are summer, how much can you afford to spend on insulation if you expect to have the building for only two years? Assume i=1 ½ % per month.
A cooperative that makes value-added products like jams and jellies has voted to purchase a new machine to fill their jars. The machine costs $23,000 and has a investment life of 9 years. The IRS will allow them to depreciate it over 10 years. The marginal tax rate will be 25% over the next 10 years and the inflation rate will be 1%. The cooperative requires a 8% pre-tax rate of return and the risk premium is 4%. What is the present value of the tax savings from depreciation? Group of answer choices $3,447 $3,744 $3,717 $3,498 None of the answers are correct
Johnny's lunches is considering purchasing a new energy-efficient grill. The grill will cost $37,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $9250. The grill will have no effect on revenues but will save Johnny's $18,500 in energy expenses. The tax rate is 30%. a. What is the operating cash flows in each year? b. What are the total cash flows in each year c. Assuming the discount rate is 11%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased.

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