Arnold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by bodybuilders. The project requires use of an existing warehouse, which the firm acquired three years ago for $3 million andwhich it currently rents out for $114,000. Rental rates are not expected to change going forward. In addition to usingthe warehouse, the project requires an upfront investment into machines and other equipment of $1.5 million. Thisinvestment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc. expectsto terminate the project at the end of eight years and to sell the machines and equipment for $503,000. Finally, theproject requires an initial investment into net working capital equal to 10% of predicted first-year sales. Subsequently,net working capital is 10% of the predicted sales over the following year. Sales of protein bars are expected to be$4.7 million in the first year and to stay constant for eight years. Total manufacturing costs and operatingexpenses (excluding depreciation) are 80% of sales, and profits are taxed at 30%.a. What are the free cash flows of the project?b. If the cost of capital is 15%, what is the NPV of the project?a. What are the free cash flows of the project?The FCF for year 0 is $ - 1.970 million. (Round to three decimal places.)The FCF for years 1-7 is $0.623 million. (Round to three decimal places.)The FCF for year 8 is $ million. (Round to three decimal places.)

a.Initial investment = $1.5 millionUseful life = 10 yearsInvestment in NWC = 10% of predicted first…

Answered: Arnold Inc. is considering a proposal…

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

See similar textbooks

Similar questions

You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $300,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $132,000. The equipment would require a $10,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $54,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%. a. What is the initial investment outlay for the spectrometer after bonus depreciation is considered, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar. $ b. What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar. Year 1: $ Year 2: $ Year 3: $ c. If the WACC is 12%, should…
Geary Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $551,998 is estimated to result in $166,942 in annual pretax cost savings. The press falls in the MACRS five-year class (Refer to the MACRS table on page 277), and it will have a salvage value at the end of the project of $137,823. The press also requires an initial investment in spare parts inventory of $50,617, along with an additional $13,747 in inventory for each succeeding year of the project. If the shop's tax rate is 0.37 and its discount rate is 0.12, what is the total cash flow in year 4? (Do not round your intermediate calculations.) (Make sure you enter the number with the appropriate +/- sign)
You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $300,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $90,000. The equipment would require an $8,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $71,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%. a. What is the initial investment outlay for the spectrometer after bonus depreciation is considered, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar. $ b. What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar. Year 1: $ Year 2: $ Year 3: $ 53,250 53,250 c. If the WACC…
Dwight Donovan, the president of Donovan Enterprises, is considering two investment opportunities. Because of limited resources, he will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the machine is expected to have a useful life of four years and no salvage value. Project B supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are $400,000 and for Project B are $160,000. The annual expected cash inflows are $126,000 for Project A and $52,800 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Donovan Enterprises' desired rate of return is 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Compute the net present value of each project. Which project should be adopted based on the net present value approach? b. Compute the approximate…
A logistic company is considering using automated guided vehicles (AGVS) system to speed up the process and cut some costs. To implement the system, the company need to anticipates the purchasing price of the AGVS system. The system will save $1,500,000 per year in labor and operational cost. However, it will incur a maintenance cost of $400,000 per year. The system is expected to have a 15-year service life and a salvage value of about $100,000. If the company's MARR is 10%, determine the maximum price that the company should pay to purchase the AGVS system so that project is profitable.
Tanaka Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $417,000 is estimated to result in $155,000 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS schedule) and it will have a salvage value at the end of the project of $56,000. The press also requires an initial investment in spare parts inventory of $16,100, along with an additional $3,100 in inventory for each succeeding year of the project. The shop's tax rate is 21 percent and its discount rate is 8 percent. Calculate the project's NPV. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Net present value
The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $71,000. The machine would replace an old piece of equipment that costs $18,000 per year to operate. The new machine would cost $8,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $26,000. The new machine would have a useful life of 10 years with no salvage value. Required: 1. What is the annual depreciation expense associated with the new bottling machine? 2. What is the annual incremental net operating income provided by the new bottling machine? 3. What is the amount of the initial investment associated with this project that should be used for calculating the simple rate of return? 4. What is the simple rate of return on the new bottling machine? (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%) 1. Depreciation expense 2. Incremental net operating income 3. Initial investment 4.…
Arnold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by body builders. The project requires use of an existing warehouse, which the firm acquired three years ago for $4 million and which it currently rents out for $139,000. Rental rates are not expected to change going forward. In addition to using the warehouse, the project requires an upfront investment into machines and other equipment of $1.3 million. This investment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc. expects to terminate the project at the end of eight years and to sell the machines and equipment for $422,000. Finally, the project requires an initial investment into net working capital equal to 10 percent of predicted first-year sales. Subsequently, net working capital is 10 percent of the predicted sales over the following year. Sales of protein bars are expected to be $4.9 million in the first year and to…
Bangor Moving Company is thinking of opening a new warehouse, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new warehouse. The equipment for the project would be depreciated by the straight-line method over the project's 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No new working capital would be required, and revenues and other operating costs would be constant over the project's 3-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.) Project cost of capital (r)10.0%Opportunity cost$100,000Net equipment cost (depreciable basis)$65,000Straight-line deprec. rate for equipment33.333%Sales revenues, each year$123,000Operating costs (excl. deprec.), each year$25,000Tax rate25%
Rogers Inc. is considering expanding into the sports drink business with a new product. Assume that you were recently hired as assistant to the director of capital budgeting and you must evaluate the new project. The sports drink would be produced in an unused building adjacent to Rogers’ Jacksonville plant; Rogers owns the building, which is fully depreciated. The required equipment would cost $1,200,000, plus an additional $300,000 for shipping and installation. In addition, inventories would rise by $300,000, while accounts payable would increase by $100,000. All of these costs would be incurred today. The equipment will be depreciated by the straight-line method over the life of the project. The project is expected to operate for 10 years, at which time it will be terminated. The cash inflows are assumed to begin 1 year after the project is undertaken and to continue until the end of the tenth year. At the end of the project’s life, the equipment is expected to have a…
Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $5.3 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would net $5.6 million. The company wants to build its new manufacturing plant on this land; the plant will cost $12.8 million to build, and the site requires $800,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567.) Cash flow amount $ eBook & Resources eBook: 10.2. Incremental Cash Flows Check my work
Arnold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by body builders. The project requires use of an existing warehouse, which the firm acquired three years ago for $1 million and which it currently rents out for $108,000. Rental rates are not expected to change going forward. In addition to using the warehouse, the project requires an upfront investment into machines and other equipment of $1.5 million. This investment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc. expects to terminate the project at the end of eight years and to sell the machines and equipment for $432,000. Finally, the project requires an initial investment into net working capital equal to 10 percent of predicted first-year sales. Subsequently, net working capital is 10 percent of the predicted sales over the following year. Sales of protein bars are expected to be $4.8 million in the first year and to…

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS