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 $13.8 million that will be depreciated straight-line to zero over the project's life. An initial investment in net working capital of $585,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $11.4 million in pretax revenues with $4.3 million in total pretax operating costs. The tax rate is 25 percent and the discount rate is 10 percent. The market value of the equipment over the life of the project is as follows: Market Value (millions) a. Year 1 $ 11.0 234 9.0 4.8 1.2 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 the project NPV assuming the project is abandoned after one year. (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-2. Compute the project NPV assuming the project is abandoned after two years. (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-3. Compute the project NPV assuming the project is abandoned after three years. (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) a. NPV if operated for four years b-1. NPV if abandoned after one year b-2. NPV if abandoned after two years b-3. NPV if abandoned after three years
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 $13.8 million that will be depreciated straight-line to zero over the project's life. An initial investment in net working capital of $585,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $11.4 million in pretax revenues with $4.3 million in total pretax operating costs. The tax rate is 25 percent and the discount rate is 10 percent. The market value of the equipment over the life of the project is as follows: Market Value (millions) a. Year 1 $ 11.0 234 9.0 4.8 1.2 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 the project NPV assuming the project is abandoned after one year. (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-2. Compute the project NPV assuming the project is abandoned after two years. (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-3. Compute the project NPV assuming the project is abandoned after three years. (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) a. NPV if operated for four years b-1. NPV if abandoned after one year b-2. NPV if abandoned after two years b-3. NPV if abandoned after three years
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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Transcribed Image Text: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 $13.8 million that will be depreciated
straight-line to zero over the project's life. An initial investment in net working capital of
$585,000 is required to support spare parts inventory; this cost is fully recoverable
whenever the project ends. The company believes it can generate $11.4 million in pretax
revenues with $4.3 million in total pretax operating costs. The tax rate is 25 percent and
the discount rate is 10 percent. The market value of the equipment over the life of the
project is as follows:
Market Value
(millions)
a.
Year
1
$ 11.0
234
9.0
4.8
1.2
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 the project NPV assuming the project is abandoned after one year. (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-2. Compute the project NPV assuming the project is abandoned after two years. (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-3. Compute the project NPV assuming the project is abandoned after three years. (Do
not round intermediate calculations and enter your answer in dollars, not
millions, rounded to 2 decimal places, e.g., 1,234,567.89.)
a. NPV if operated for four years
b-1. NPV if abandoned after one year
b-2. NPV if abandoned after two years
b-3. NPV if abandoned after three years
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