Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Fox Co.: Fox Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Unit sales Sales price Variable cost per unit Fixed operating costs except depreciation Accelerated depreciation rate This project will require an investment of $10,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Fox pays at constant tax rate of 40%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project's net present value (NPV) would be when using accelerated depreciation. Year 3 Year 1 Year 2 5,500 5,200 5,700 $42.57 $43.55 $44.76 $22.83 $22.97 $23.45 $66,750 $68,950 $69,690 15% 33% 45% O $82,622 O $66,098 O $99,146 O $74,360 Year 4 5,820 $46.79 $23.87 $68,900 7% Determine what the project's net present value (NPV) would be when using accelerated depreciation.

Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Fox Co.: Fox Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Unit sales Sales price Variable cost per unit Fixed operating costs except depreciation Accelerated depreciation rate This project will require an investment of $10,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Fox pays at constant tax rate of 40%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project's net present value (NPV) would be when using accelerated depreciation. Year 3 Year 1 Year 2 5,500 5,200 5,700 $42.57 $43.55 $44.76 $22.83 $22.97 $23.45 $66,750 $68,950 $69,690 15% 33% 45% O $82,622 O $66,098 O $99,146 O $74,360 Year 4 5,820 $46.79 $23.87 $68,900 7% Determine what the project's net present value (NPV) would be when using accelerated depreciation.

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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TLT Ltd is considering the purchase of a new machine for use in its production process. Management has developed three alternative proposals to help evaluate the machine purchase. Only one of these proposals can be implemented. Proposals A and B both have the same cost to set up, but the output from proposal A (as measured by future net cash flows) commences at a high rate and then declines over time, while Proposal B starts at a low rate and then increases over time. Proposal C involves buying two of the machines considered under proposal B. That is, proposal C is simply Proposal B scaled by a factor of two. Proposal C results in net cash flows which are similar in magnitude to proposal A's net cash flows in the first two years. The estimated net cash flows, internal rates of return and net present values at 9% and 11% for each proposal are given in the following table. Proposal A -$290,000 $100,000 $90,000 Proposal B -$290,000 $40,000 $50,000 Proposal C -$580,000 $80,000 $100,000 End…
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Assume that a company is considering purchasing a machine for $100,000 that will have a seven-year useful life and no salvage value. The machine will lower operating costs by $18,000 per year. The company also expects this investment to provide qualitative benefits that it is struggling to incorporate into its financial analysis. Assuming the company's required rate of return is 17% and the net present value of the investment before considering the qualitative benefits is $(29,404), the minimum dollar value per year that must be provided by the machine's qualitative benefits to justify the $100,000 investment is closest to: Multiple Choice O O о O $7,787. $8,247. $7,497. $8,067.
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Randall's Ales & Porters S.A., is considering expanding into Costa Rica. As an incentive, Costa Rica agrees not to charge the company any taxes. The project has the following estimated data: price = $94 per unit variable costs = $50.76 per unit fixed costs = $7,600 required return = 16 percent initial investment = $11,000 life = three years depreciable life = three years, straight-line. Required: (a)What is the accounting break-even quantity? (Do not round your intermediate calculations.) (Click to select) ♥ (b)What is the cash break-even quantity? (Do not round your intermediate calculations.) (Click to select) ♥ (c) What is the financial break-even quantity? (Do not round your intermediate calculations.) (Click to select) ♥
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