(Calculating project cash flows and NPV) Raymobile Motors is considering the purchase of a new production machine for $400,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $180,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $20,000 after tax. In addition, it would cost $3,500 after tax to install this machine correctly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $20,000. This machine has an expected life of 10 years, after which it will have no salvage value. Assume simplified straight-line depreciation, that this machine is being depreciated down to zero, a 32 percent marginal tax rate, and a required rate of return of 8 percent. a. What is the initial outlay associated with this project? b. What are the annual after-tax cash flows associated with this project for years 1 through 9? c. What is the terminal cash flow in year 10 (that is, the annual after-tax cash flow in year 10 plus any additional cash flows associated with termination of the project)? d. Should this machine be purchased?

(Calculating project cash flows and NPV) Raymobile Motors is considering the purchase of a new production machine for $400,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $180,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $20,000 after tax. In addition, it would cost $3,500 after tax to install this machine correctly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $20,000. This machine has an expected life of 10 years, after which it will have no salvage value. Assume simplified straight-line depreciation, that this machine is being depreciated down to zero, a 32 percent marginal tax rate, and a required rate of return of 8 percent. a. What is the initial outlay associated with this project? b. What are the annual after-tax cash flows associated with this project for years 1 through 9? c. What is the terminal cash flow in year 10 (that is, the annual after-tax cash flow in year 10 plus any additional cash flows associated with termination of the project)? d. Should this machine be purchased?

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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(Ignore income taxes in this problem.) Your Company is considering an investment in a project that will have a three-year life. The project will provide a 4% internal rate of return and is expected to have a $40,000 cash inflow the first year and a $0 cash inflow in the second year, and $50,000 cash inflow in the third year. What investment is required in the project?
Cecil company is considering the of a new machine. The machine cost $227,500 and will generate a yearly cash inflow of $35,000. what is the payback period? Requirement: what is the payback period?
Dynamic is considering investing in a rooftop solar network to generate its own power. Any unused power will be sold back to the local utility company. Between cost savings and new revenues, the company expects to generate $1,460,000 per year in net cash inflows from the solar network installation. The solar network would cost $7.2 million and is expected to have a 18-year useful life with no residual value. Calculate (i) the internal rate of return (IRR) and (ii) the net present value (NPV) assuming the company uses a 13% hurdle rate. (i) Calculate the internal rate of return (IRR). Use technology to find this value. (Enter a percentage rounded to two decimal places, X.XX%.) The IRR is %.
Beryl's Iced Tea currently rents a bottling machine for $52,000 per year, including all maintenance expenses. It is considering purchasing a machine instead and is comparing two options: a. Purchase the machine it is currently renting for $150,000. This machine will require $25,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $250,000. This machine will require $16,000 per year in ongoing maintenance expenses and will lower bottling costs by $11,000 per year. Also, $39,000 will be spent up front to train the new operators of the machine. Suppose the appropriate discount rate is 7% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each year, as is the cost of the rental machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a 10-year life with a negligible salvage value. The marginal corporate tax rate is 20%. Should Beryl's Iced…
Green & Company is considering investing in a robotics manufacturing line. Installation of the line will cost an estimated $15.7 million. This amount must be paid immediately even though construction will take three years to complete (years 0, 1, and 2). Year 3 will be spent testing the production line and, hence, it will not yield any positive cash flows. If the operation is very successful, the company can expect after-tax cash savings of $10.7 million per year in each of years 4 through 7. After reviewing the use of these systems with the management of other companies, Green's controller has concluded that the operation will most probably result in annual savings of $7.9 million per year for each of years 4 through 7. However, it is entirely possible that the savings could be as low as $3.7 million per year for each of years 4 through 7. The company uses a 12 percent discount rate. Use Exhibit A.8. Required: Compute the NPV under the three scenarios. Note: Round PV factor to 3…
Beryl's Iced Tea currently rents a bottling machine for $55,000 per year, including all maintenance expenses. It is considering purchasing a machine instead, and is comparing two options: a. Purchase the machine it is currently renting for $160,000. This machine will require $23,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $250,000. This machine will require $15,000 per year in ongoing maintenance expenses and will lower bottling costs by $12,000 per year. Also, $39,000 will be spent upfront training the new operators of the machine. Suppose the appropriate discount rate is 8% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each year, as is the rental of the machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a ten-year life with a negligible salvage value. The corporate tax rate is 20%. Should Beryl's Iced Tea continue…
A firm is considering an investment in a new machine with a price of $15.9 million to replace its existing machine. The current machine has a book value of $5.7 million and a market value of $4.4 million. The new machine is expected to have a 4-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $6.45 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $280,000 in net working capital. The required return on the investment is 11 percent and the tax rate is 23 percent. The company uses straight-line depreciation. a)- What is the NPV of the decision to purchase the new machine? b) What is the IRR of the decision to purchase the new machine? c) WHat is the NPV of the decison to keep using the old machine? d) What is the IRR of the decison to keep…
Garry Manufacturing Company is considering a three-year project that has a cost of $75,000. The project will generate after-tax cash flows of $33,100 in Year 1, $31,500 in Year 2, and $31,200 in Year 3. Assume that the firm's proper rate of discount is 10% and that the firm's tax rate is 40%. What is the project's payback and outline any limitations in using the payback period method in selecting acceptable projects?
Beryl's Iced Tea currently rents a bottling machine for $50,000 per year, including all maintenance expenses. It is considering purchasing a machine instead and is comparing two options: a. Purchase the machine it is currently renting for $155,000. This machine will require $23,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $260,000. This machine will require $17,000 per year in ongoing maintenance expenses and will lower bottling costs by $14,000 per year. Also, $36,000 will be spent up front to train the new operators of the machine. Suppose the appropriate discount rate is 9% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each year, as is the cost of the rental machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a 10-year life with a negligible salvage value. The marginal corporate tax rate is 20%. Should Beryl's Iced…
although the Chen Company's milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $120,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $18,200 per year. It would have zero salvage value at the end of its life. The project cost of capital is 12%, and its marginal tax rate is 25%. Should Chen buy the new machine? Do not round intermediate calculations. Round your answer to the nearest cent. Negative value, if any, should be indicated by a minus sign.
Although the Chen Company's milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $100,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $18,400 per year. It would have zero salvage value at the end of its life. The project cost of capital is 10%, and its marginal tax rate is 25%. Should Chen buy the new machine? Do not round intermediate calculations. Round your answer to the nearest cent. Negative value, if any, should be indicated by a minus sign. NPV: $
Munch N' Crunch Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $43,056 and could be used to deliver an additional 95,000 bags of pretzels per year. Each bag of pretzels can be sold for a contribution margin of $0.45. The delivery truck operating expenses, excluding depreciation, are $1.35 per mile for 24,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $61,614. The new machine would require three fewer hours of direct labor per day. Direct labor is $18 per hour. There are 250 operating days in the year. Both the truck and the bagging machine are estimated to have 7-year lives. The minimum rate of return is 13%. However, Munch N' Crunch has funds to invest in only one of the projects. Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 2 3 4 5 6 7 8 9 10 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360…

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