Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes over the next five years.Method one (implosion) is relatively low in risk for this business and will carry a 13 percent discount rate. Method two (explosion) is lessexpensive to perform but more dangerous and will call for a higher discount rate of 17 percent. Either method will require an initialcapital outlay of $92,000. The inflows from projected business over the next five years are shown next.Years Method 1 Method 212345$31,100 $20,80037,20024,40044,60042,20038,80037,30019,20070,900Use Appendix B for an approximate answer but calculate your final answers using the formula and financial calculator methods.a. Calculate net present value for Method 1 and Method 2. (Do not round intermediate calculations and round your answers to 2decimal places.)Method 1Method 2Net Present Valueb. Which method should be selected using net present value analysis?Method 1Method 2ONeither of these

The difference between the current value of cash inflows and outflow of cash over a period of time…

Answered: Dixie Dynamite Company is evaluating…

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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Pivot, Inc. is currently valuing a new project that has the average risk of its investment projects. The project requires upfront R&D and marketing expenses of $10 million and a $30 million investment in equipment. The equipment will be obsolete in 3 years and will be depreciated using the straight-line method over that period. For each year over the next 3 years, the project offers annual sales of $100 million, has annual manufacturing costs of $30 million, and annual operating expenses of $10 million. Further, the project requires no net working capital in year 0, and $2.0 million in net working capital in each year from year 1 to year 2 and no net working capital in year 3. Beyond year 3, the project's free cash flows are expected to growth at an annual rate of 1%. Pivot currently has 20 million outstanding shares with its stock price of $30 per share, $320 million in debt, $20 million in excess cash, the cost of debt of 5%, and the cost of equity of 10%, and the corporate tax rate…
The Reiph Transportation Company is planning to buy a new fleet of trucks requiring an initial investment of $1,000,000, and $2,500,000 annually to maintain and operate. The expected life of the new fleet is 10 years. The revenue is estimated to be $5,000,000 per year and the salvage value is expected to be $250,000. The MARR is 18%. Conduct a sensitivity analysis based on the given information. a. Calculate the PW of the Base case based on above given data. (Do not use AW or FW) b. Calculate the PW for the range of -10% to +15% for initial cost. (Do not use AW or FW)
A company is considering a project that will require an immediate outlay of $28 000 and $28 000 outlays for the next two years. At the end of the project, the company expects to salvage the physical assets for $49 000. The project is estimated to yield net returns of $58 000 in Year 5, $42 000 in Year 7, and $7 000 for each of the following 5 years. The required rate of return is 13.2%. What is the value for CFo? O a. CFo= $58 000 O b. CFo=-$28 000 c. CFO = $49 000 O d. CFo= $56 000
Bruin Building Supply is considering expansion. Operating cash flow will be $710,000 a year. The project will require new equipment costing $1,850,000 that would be depreciated on a straight-line basis to zero over the 5-year life of the project. The equipment will have a market value of $370,000 at the end of the project. The project requires an initial investment of $525,000 in net working capital, which will be recovered at the end of the project. The tax rate is 28.00 percent. What is the project's IRR? Answer in whole numbers, rounded to three decimal places.
Spacevoyage Inc. is considering the installation of a new experimental laboratory which requires a key equipment costing $5,000,000. It is expected that the equipment will generate important experimental material worth $2,000,000 for each of the next 5 years. In the 6th year, the equipment will need an upgrade costing $2,500,000. Required return for this project is 15%. a) Which capital budgeting method between NPV and IRR will be most suitable for arriving at a decision on whether or not to get the equipment installed? Briefly explain your reasons. b) Should the new equipment be installed? Support your answer with relevant computation.
Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes over the next five years. Method one (implosion) is relatively low in risk for this business and will carry a 12 percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call for a higher discount rate of 17 percent. Either method will require an initial capital outlay of $80,000. The inflows from projected business over the next five years are shown next. Years 1 2 3 4 5 Method 1 $ 31,700 36,800 46,900 35,200 26,500 Method 1 Method 2 Method 2 $ 19,800 30,600 34,500 34,700 70,400 Use Appendix B for an approximate answer but calculate your final answers using the formula and financial calculator methods. a. Calculate net present value for Method 1 and Method 2. Note: Do not round intermediate calculations and round your answers to 2 decimal places. Net Present Value analysis?
Carson Trucking is considering whether to expand its regional service center in Mohab, UT. The expansion requires the expenditure of $10,500,000 on new service equipment and would generate annual net cash inflows from reduced costs of operations equal to $2,000,000 per year for each of the next 9 years. In year 9 the firm will also get back a cash flow equal to the salvage value of the equipment, which is valued at $1.2 million. Thus, in year 9 the investment cash inflow totals $3,200,000. Calculate the project's NPV using a discount rate of 10%. If the discount rate is 10%, then the project's NPV is $____________
Cirice Corporation is considering opening a branch in another state. The operating cash flow will be $ 150, 400 a year. The project will require new equipment costing $592, 000 that would be depreciated on a straight-line basis to zero over the 6-year life of the project. The equipment will have a market value of $ 177,000 at the end of the project. The project requires an initial investment of $41,000 in net working capital, which will be recovered at the end of the project. The tax rate is 23 percent. What is the project's IRR? Multiple Choice 12.33% 17.06% 15.99% 15.67% 14.74%
Tidal Wave is considering purchasing a water park in Fort Worth, Texas, for $2,100,000. The new facility will generate annual net cash inflows of $495,000 for ten years. Engineers estimate that the facility will remain useful for ten years and have no residual value. The company uses straight-line depreciation. Its owners want payback in less than five years and an ARR of 12% or more. Management uses a 10% hurdle rate on investments of this nature. (Click the icon to view the present value annuity table.) (Click the icon to view the future value annuity table.) Read the requirements. (Click the icon to view the present value table.) (Click the icon to view the future value table.) Requirement 1. Compute the payback period, the ARR, the NPV, and the approximate IRR of this investment. (If you use the tables to compute the IRR, answer with the closest interest rate shown in the tables.) (Round the payback period to one decimal place.) The payback period (in years) is (Round the…
Carson Trucking is considering whether to expand its regional service center in Mohab, UT. The expansion requires the expenditure of $9,500,000 on new service equipment and would generate annual net cash inflows from reduced costs of operations equal to $2,000,000 per year for each of the next 6 years. In year 6 the firm will also get back a cash flow equal to the salvage value of the equipment, which is valued at $1 million. Thus, in year 6 the investment cash inflow totals $3,000,000. Calculate the project's NPV using a discount rate of 7 percent.
Moose Pastures Inc. is considering a seven-year project to improve its production efficiency. Buying a new assembly machine for $708, 000 is estimated to result in $213,000 in annual pre-tax cash flows. The machine has a CCA rate of 30% per year, and it will have a salvage value of $70,000 at the end of the project. The machine also requires an initial investment in inventory of $20, 000 (in year zero), which will be recovered at the end of the project (in year 7). If the tax rate is 40% and the discount rate is 10%, what is the NPV of the machine purchase? (Assume the CCA pool remains open and that there are no capital gains/losses.) Correct answer is $132, 337. (My question) Hi I am confused on how it got 132, 337. I know there's a formula but can you walk me through the steps to get this correct answer?
Appendix B Present value of $1, PV, PV = FV (1+ 0". Percent Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.287 12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257 0.879 0.773…

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