TABLE 8.3Depreciation under ModifiedAccelerated Cost RecoverySystem (MACRS)YEAR1234 in 600081011121314151627298&17181920213 YEARS3333444514810741RECOVERY PERIOD CLASS7 YEARS5 YEARS2000320019201152115205761429244917491249089308920893044610 YEARS1000180014401152092207370655065506560655032815 YEARS050009500855077006930623059005900591059005910590059105900591029520 YEARS037500721906677061770571305285048880452204462044610446204461044620446104462044610446204461044620446102231Depreciation is expressed as a percent of the asset's cost. These schedules are based on the IRS publication 946 How to Depreciate Propertyand other details on depreciation are prasanted later in the chapter. Note that five-year depreciation actually cames over six years because theIRS assumos purchase is made in midyear Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulationimplant as follows:Year Unit Sales88,000101,000H115,000110,00091,00012345Production of the implants will require $1,670,000 in net working capital to start andadditional net working capital investments each year equal to 10 percent of theprojected sales increase for the following year. Total fixed costs are $1,570,000 per year,variable production costs are $300 per unit, and the units are priced at $415 each. Theequipment needed to begin production has an installed cost of $21,700,000. Becausethe implants are intended for professional singers, this equipment is consideredindustrial machinery and thus qualifies as seven-year MACRS property. In five years, thisequipment can be sold for about 15 percent of its acquisition cost. The tax rate is 22percent and the required return on the project is 17 percent. Refer to Table 8.3.a. What is the NPV of the project? (Do not round intermediate calculations and roundyour answer to 2 decimal places, e.g., 32.16.)b. What is the IRR? (Do not round intermediate calculations and enter your answer asa percent rounded to 2 decimal places, e.g., 32.16.)NPVa.b. IRR%

NPV It is a capital budgeting tool to decide on whether the capital project should be accepted or…

Answered: Aria Acoustics, Inc. (AAI), projects…

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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An airport expansion that is expected to be used indefinitely is under way at Jackson Hole Metro Airport. Land acquisition and major earthworks that will last as long as the airport is used are expected to cost $600 million. Terminal construction that will last 20 years is budgeted at $200 million. (Assume that the terminal is to be identically replaced every 20 years.) Runway construction will cost $150 million. The runways will also be used indefinitely, with repaving required every 10 years at a cost of $10 million. The operating and maintenance costs are estimated to be $15 million per year. What is the annual cost of the project if i = 5% and the airport will be used indefinitely?
es United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use of an existing warehouse, which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $150,000, and thereafter, the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.50 million. This could be depreciated for tax purposes straight-line over 10 years. However, Pigpen expects to terminate the project at the end of 8 years and to resell the plant and equipment in year 8 for $500,000. Finally, the project requires an immediate investment in working capital of $400,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year 1 sales of hog feed are expected to be $5.20 million, and thereafter, sales are forecasted to grow by 5% a year, slightly faster than the inflation rate. Manufacturing…
Cori's Meats is looking at a new sausage system with an installed cost of $505,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped for $75,000. The sausage system will save the firm $185,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $34,000. If the tax rate is 25 percent and the discount rate is 8 percent, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $ 553,988.52
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $ 50,000 2 35,000 3 30,000 4 20,000 Thereafter 0 Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $60,000 in plant and equipment. Required: What is the initial investment in the product? Remember working capital. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight - line depreciation, and the firm's tax rate is 20%, what are the project cash flows in each year? If the opportunity cost of capital is 10%, what is project NPV?
United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use of an existing warehouse, which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $195,000, and thereafter, the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.77 million. This could be depreciated for tax purposes straight-line over 10 years. However, Pigpen expects to terminate the project at the end of 8 years and to resell the plant and equipment in year 8 for $590,000. Finally, the project requires an immediate investment in working capital of $445,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year 1 sales of hog feed are expected to be $6.10 million, and thereafter, sales are forecasted to grow by 5% a year, slightly faster than the inflation rate. Manufacturing costs…
Consider a project to supply Detroit with 40,000 tons of machine screws annually forautomobile production. You will need an initial $5,600,000 investment in threadingequipment to get the project started; the project will last for 6 years. The accountingdepartment estimates that annual fixed costs will be $600,000 and that variable costsshould be $250 per ton. Further, the accounting department will depreciate the initialfixed asset investment straight-line to zero over the 6-year project life and estimate asalvage value of $450,000 after dismantling costs. The marketing department estimatesthat the automakers will let the contract at a selling price of $340 per ton. The engineeringdepartment estimates you will need an initial net working capital investment of $560,000.You require a return of 13 percent and face a marginal tax rate of 24 percent on thisproject.Suppose you’re confident about your own projections, but you’re a little unsure aboutDetroit’s actual machine screw…
4. Your company is considering the introduction of a new product line. The initial investment required for this project is $500,000, and annual maintenance costs are anticipated to be $35,000. Annual operating costs will be directly proportional to the level of production at $7.50 per unit, and each unit of product can be sold for $50. If the MARR is 15% and the project has a life of 5 years, what is the minimum annual production level for which the project is economically viable?
Pappy’s Potato has come up with a new product, the Potato Pet. Pappy’s paid $50,000 for a marketing survey to determine the viability of the product. It is estimated that Potato Pet will generate sales of $780,000 per year. The fixed costs associated with this project will be $178,000 per year and variable costs will amount to 30% of sales. The equipment will cost $600,000 and be depreciated in a straight-line manner for the four years of the project life. It can be sold for $20,000 at the end of the project. The initial net operating working capital is $40,000 and will increase by $10,000 each year until the end of the project. Pappy’s is paying a 25% tax rate and has a required rate of return of 6%.The NPV of this project is $__________________.
Projects A and B have first costs of $5,000 and $9,000 respectively. Project A has net annual benefits of $2,500 during each year of its 5-year useful life, after which it can be replaced identically. • Project B has net annual benefits of $3,300 during each year of its 10-year life. Use present worth analysis, an interest rate of 30% per year, and a 10-year analysis period to determine which project to select. Project A Project B
Danford Company, a manufacturer of farm equipment, currently produces 20,000 units of gas filters per year for use in its lawn-mower production. The costs, based on the previous year's production, are reported below. It is anticipated that gas-filter production will last five years. If the company continues to produce the product in-house, annual direct material costs will increase $3000/year (For example, annual material costs during the first production year will be $63,000.) Direct labor will also increase by $5000/year. However, variable overhead costs will increase at the rate of $2000/year and the fixed overhead will remain at its current level over the next five years. John Holland Company has offered to sell Danford 20,000 units of gas filters for $25 per unit. If Danford accepts the offer, some of the manufacturing facilities currently used to manufacture the filter could be rented to a third party for $35,000 per year. The firm's interest rate is known to be 15%. What is the…
BIG Pharmaceuticals Ltd. has invested $330,000 to date in developing a new typeof insect repellent. The repellent is now ready for production and sale, and theMarketing Manager estimates that the product will sell 170,000 bottles in the firstyear, 210,000 bottles in the second years and 260,000 bottles a year over the nextthree years. The selling price of the insect repellent will be $6.00 a bottle andvariable costs are estimated to be $3.00 a bottle. Second- and third-year price willbe $6.99 a bottle with a variable cost of $3.50 a bottle, Fourth- and fifth yearselling price will be $7.95 with a variable cost of $3.75. Fixed costs (excludingamortization) are expected to be $210,000 a year. The figure is made up of$165,000 additional fixed costs and $45,000 fixed costs relating to the existingbusiness that will be apportioned to the new business. These costs will increaseby 5% each year.To produce the repellent, machinery and equipment costing $650,000 will have tobe purchased…
You are responsible to manage an IS project with a 4-year horizon. The annal cost of the project is estimated at $40,000 per year, and a one-time costs of $120,000. The annual monetary benefit of the project is estimated at $96,000 per year with a discount rate of 6 percent. a. Calculate the overall return on investment (ROI) of the project. b. Perform a break-even analysis (BEA). At what year does break-even occur?

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