CHAPTER 9 Making Capital Investment Decisions 7. Calculating Salvage Value An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $6.8 million and will be sold for $1.46 million at the end of the project. If the tax rate is 23 percent, what is the aftertax salvage value of the asset? LO 2 8. Calculating Project OCF Cusic Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $26,400, and the company expects to sell 1,500 per year. The company currently sells 1,850 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,520 units per year. The old board retails for $24,900. Variable costs are 55 percent of sales, 0 2 depreciation on the equipment to produce the new board will be $1.875 million per year, and fixed costs are $2.9 million per year. If the tax rate is 22 percent, what is the annual OCF for the project? 9. Calculating Project OCF H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.15 million. The fixed asset will be depreciated straight-line to zero over its three- 2 year tax life, after which time it will be worthless. The project is estimated to generate $2.23 million in annual sales, with costs of $1.25 million. If the tax rate is 23 percent, what is the OCF for this project? 10. Calculating Project NPV In the previous problem, suppose the required return on the project is 14 percent. What is the project's NPV? 2 11. Calculating Project Cash Flow from Assets In the previous problem, suppose the project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $185,000 at the end of the project. What is the project's Year 0 net cash flow? Year 1? Year 2? NPY?
CHAPTER 9 Making Capital Investment Decisions 7. Calculating Salvage Value An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $6.8 million and will be sold for $1.46 million at the end of the project. If the tax rate is 23 percent, what is the aftertax salvage value of the asset? LO 2 8. Calculating Project OCF Cusic Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $26,400, and the company expects to sell 1,500 per year. The company currently sells 1,850 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,520 units per year. The old board retails for $24,900. Variable costs are 55 percent of sales, 0 2 depreciation on the equipment to produce the new board will be $1.875 million per year, and fixed costs are $2.9 million per year. If the tax rate is 22 percent, what is the annual OCF for the project? 9. Calculating Project OCF H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.15 million. The fixed asset will be depreciated straight-line to zero over its three- 2 year tax life, after which time it will be worthless. The project is estimated to generate $2.23 million in annual sales, with costs of $1.25 million. If the tax rate is 23 percent, what is the OCF for this project? 10. Calculating Project NPV In the previous problem, suppose the required return on the project is 14 percent. What is the project's NPV? 2 11. Calculating Project Cash Flow from Assets In the previous problem, suppose the project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $185,000 at the end of the project. What is the project's Year 0 net cash flow? Year 1? Year 2? NPY?
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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Number 8
Transcribed Image Text:CHAPTER 9
Making Capital Investment Decisions
7. Calculating Salvage Value An asset used in a four-year project falls in the
five-year MACRS class for tax purposes. The asset has an acquisition cost of
$6.8 million and will be sold for $1.46 million at the end of the project. If the
tax rate is 23 percent, what is the aftertax salvage value of the asset?
LO 2
8. Calculating Project OCF Cusic Music Company is considering the sale
of a new sound board used in recording studios. The new board would sell
for $26,400, and the company expects to sell 1,500 per year. The company
currently sells 1,850 units of its existing model per year. If the new model
is introduced, sales of the existing model will fall to 1,520 units per year.
The old board retails for $24,900. Variable costs are 55 percent of sales,
0 2
depreciation on the equipment to produce the new board will be $1.875
million per year, and fixed costs are $2.9 million per year. If the tax rate is
22 percent, what is the annual OCF for the project?
9. Calculating Project OCF H. Cochran, Inc., is considering a new three-year
expansion project that requires an initial fixed asset investment of $2.15
million. The fixed asset will be depreciated straight-line to zero over its three-
2
year tax life, after which time it will be worthless. The project is estimated to
generate $2.23 million in annual sales, with costs of $1.25 million. If the tax
rate is 23 percent, what is the OCF for this project?
10. Calculating Project NPV In the previous problem, suppose the required
return on the project is 14 percent. What is the project's NPV?
2
11. Calculating Project Cash Flow from Assets In the previous problem,
suppose the project requires an initial investment in net working capital of
$150,000, and the fixed asset will have a market value of $185,000 at the end
of the project. What is the project's Year 0 net cash flow? Year 1? Year 2?
NPY?
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