Consider a project to supply Detroit with 25,000 tons of machine screws annually for automobile production. You will need an initial $5,400,000 investment in threading equipment to get the project started; the project will last for 6 years. The accounting department estimates that annual fixed costs will be $1,300,000 and that variable costs should be $245 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 6-year project life. It also estimates a salvage value of $675,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $356 per ton. The engineering department estimates you will need an initial net working capital investment of $520,000. You require a return of 9 percent and face a tax rate of 21 percent on this project. Calculate the accounting, cash, and financial break-even quantities. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) Cash break-even Accounting break-even Financial break-even

Consider a project to supply Detroit with 25,000 tons of machine screws annually for automobile production. You will need an initial $5,400,000 investment in threading equipment to get the project started; the project will last for 6 years. The accounting department estimates that annual fixed costs will be $1,300,000 and that variable costs should be $245 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 6-year project life. It also estimates a salvage value of $675,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $356 per ton. The engineering department estimates you will need an initial net working capital investment of $520,000. You require a return of 9 percent and face a tax rate of 21 percent on this project. Calculate the accounting, cash, and financial break-even quantities. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) Cash break-even Accounting break-even Financial break-even

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

Kimoto Ltd has designed a new product and conducted a market survey costing $30,000 to assess its viability. The survey has determined that the new product will generate sales of $1,200,000 per year. Fixed costs associated with the product will be $50,000 a year and variable costs will amount to 35% of sales. The equipment necessary for production will cost $1,500,000 and is to be depreciated evenly over the project’s life of 5 years (straight-line method). In addition, $45,000 in net working capital is required to fund the project. The tax rate is 30%. The company believes the risk of the new project is the same as the risk of the company’s existing assets. Kimoto’s capital consists of the following : Ordinary Shares: The company has 2 million ordinary shares outstanding, currently selling for $150 per share and a beta of 1.2. The market risk premium (rm-rf) is 8% and the risk-free rate is 3%. Preference Shares: The company has 1 million preference shares, currently selling for $85…
A Company is considering the development of a plan. The company estimates that the plant and equipment would require an initial of $12 million and sales revenue of $3.0 million a year is expected over the project lifespan of 6 years. The plant and equipment will be fully depreciated using the straight-line method with zero salvage value. Yearly variable costs are $25,000 and fixed costs are $40,000, respectively. The project’s cost of capital is 12% and a corporate tax rate of 30%. Using NPV should this project be undertaken?
Consider the following project of Hand Clapper, Incorporated. The company is considering a four-year project to manufacture clap-command garage door openers. This project requires an initial investment of $14 million that will be depreciated straight- line to zero over the project's life. An initial investment in net working capital of $590,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $11.6 million in pretax revenues with $4.4 million in total pretax operating costs. The tax rate is 21 percent and the discount rate is 11 percent. The market value of the equipment over the life of the project is as follows: Year Market Value (millions) a. 1 $ 11.2 9.1 234 4.9 1.3 Assuming the company operates this project for four years, what is the NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) b-1. Compute…
Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $ 3,210,000 and will last for six years. Variable costs are 37 percent of sales, and fixed costs are $350,000 per year. Machine B costs $5,455,000 and will last for nine years. Variable costs for this machine are 32 percent of sales and fixed costs are $240,000 per year. The sales for each machine will be $12.4 million per year. The required return is 9 percent, and the tax rate is 24 percent. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis. Calculate the EAC for each machine.
Nikul
Motion Metrics is considering a four-year project to improve its production efficiency. Buying a new production equipment for $414,000 is estimated to result in $154,000 in annual pre-tax cost savings. The equipment falls into Class 8 for CCA purposes (CCA rate of 20% per year), and it will have a salvage value at the end of the project of $55,400. The project also requires an initial investment in spare parts inventory of $24,000, along with an additional $3,500 in inventory for each succeeding year of the project. If the firm's tax rate is 35% and its discount rate is 9%. Calculate the NPV of this project. (Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) O NPV
You are evaluating a product for your company. You estimate the sales price of product to be $150 per unit and sales volume to be 10,500 units in year 1; 25,500 units in year 2; and 5,500 units in year 3. The project has a 3 year life. Variable costs amount to $75 per unit and fixed costs are $205,000 per year. The project requires an initial investment of $339,000 in assets which will be depreciated straight-line to zero over the 3 year project life. The actual market value of these assets at the end of year 3 is expected to be $45,000. NWC requirements at the beginning of each year will be approximately 15% of the projected sales during the coming year. The tax rate is 21% and the required return on the project is 12%. What will the year 2 free cash flow for this project be?
Gemstones Inc. is considering a new production line. The expected economic life of the project is 6 years. The project will generate sales and incur costs annually. Variable cost is 52% of sales. Total annual fixed costs, excluding depreciation, are $353,000. The initial outlay of the project is $1,010,000 and will be depreciated on a straight-line basis to zero at the end of the project. The company's tax rate is 30% and the discount rate is 10.00%. Calculate the NPV break-even level of sales. (Assume that the half-year rule does not apply.) a. $1,425,606 b. $2,241,776 c. $1,575,903 d. $1,275,308 e. $3,103,472
Atlantic Manufacturing is considering a new investment project that will last for four years. The delivered and installed cost of the machine needed for the project is $23,957 and it will be depreciated according to the three-year MACRS schedule. The project also requires an initial increase in net working capital of $300. Financial projections for sales and costs are in the table below. In addition, since sales are expected to fluctuate, NWC requirements will also fluctuate. The end-of- year NWC requirements are included below (hint: these NWC capital requirements DO NOT represent the change in NWC for the period). The $0 requirement for NWC at the end of year 4 means that all NWC is recovered by the end of the project. The corporate tax rate is 35% and the required return on the project is 12%. Year 1 2 3 4 Sales $11,653 $12,746 $13,973 $10,638 Costs 2,322 2,536 3,456 1,434 NWC 324 352 231 0 Requirements What is the project's NPV? (Round answer to O decimal places. Do not round…
Cori's Meats is looking at a new sausage system with an installed cost of $435,000. 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 $61,000. The sausage system will save the firm $255,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $20,000. If the tax rate is 24 percent and the discount rate is 9 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
Consider an order delivery business that will be a 5-year project. The required net working capital is $6.6 million and it will be returned at the end of the life of the project. Required equipment (net capital spending) will cost $15 and it will be depreciated straight-line to 0 over the 5-year life of the project. The business will have sales of $3 million in year 1, $6 million in year 2, and $10 million in years 3, 4, and 5. Costs are 30% of sales and the tax rate is 20%. (If there is a loss at the EBIT line, assign taxes of 0 for that year and do not carry tax losses forward.) The equipment has no salvage value. Create an income statement for years 1, 2, and 3, 4, and 5 (3, 4, and 5 will have the same income statement). Use the information from the income statement to calculate the operating cash flow using EBIT + depreciation – taxes for each year. Put all cash flows (net working capital, net capital spending, and operating cash flows) on a timeline. Using total cash flows from…
Use the following base case information to evaluate the project: PT Kolam Makara has a project costs $900,000, has a five-year life, and has a salvage value of $130,000. Depreciation is straight-line to zero. The required return is 14% and tax rate is 34%. Sales are projected at 2350 units per year. Price per unit is $400. Variable cost per unit is $200 and fixed costs are $150,000 per year. It is known that the depreciation expense is $180,000 per year. The engineering department estimates you will need an initial net working capital investment of $50,000. What is the sensitivity of OCF to changes in the variable cost figure at base case?

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

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

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