DRTF Inc. will acquire a building at a cost of $400,000 in addition to paying capitalizablecosts of $ 50,000. The building is the only onein its category and is tax depreciable on thedeclining balance at 4%. The building'santicipated resale value in 10 years is $850,000. The LEED-compliant building iseligible for a grant of $ 125,000. You areinformed that the tax rate is 20%, the risk-freerate is 4%, creditors require a premium of 5%and shareholders require a premium of 10%on the resale value. Using the marginalanalysis, determine the net benefit (in presentvalue) of the subsidy.

Net Present Value (NPV) is a financial metric used to assess the profitability of an investment by…

Answered: DRTF Inc. will acquire a building at a…

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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Rare Agri-Products Ltd. is considering a new project with a projected life of seven (7) years. The project falls under the government’s subsidy program for encouraging local agricultural products and is eligible for a one-time rebate of 25% on any initial equipment installed for the project. The initial equipment (IE) will cost $41,000,000. An additional equipment (AE) costing $3,500,000 will be needed at the end of year 3. At the end of seven (7) years, the original equipment, IE, will have no resale value but the supplementary equipment, AE, can be sold for $50,000. A working capital of $1,350,000 will be needed. Question: What is the initial investment required
Briggs-Gridley Memorial Hospital, a non-taxpaying entity, is starting a new inpatient heart center on its third floor. The expected patient volume demands will generate $5,000,000 per year in revenues for the next 5 years. The new center will incur operating expenses, excluding depreciation, of $3,000,000 per year for the next 5 years. The initial cost of building and equipment is $7,000,000. Straight-line depreciation is used to estimate depreciation expense, and the building and equipment will be depreciated over a 5 year life to its salvage value of $800,000. The cost of capital for this project is 10%. Compute the NPV to determine the financial feasibility of this project. Compute the IRR to determine the financial feasibility of this project. Compute the NPV to determine the financial feasibility of this project if Briggs-Gridley was a tax-paying entity with a tax rate of 30%. Compute the IRR to determine the financial feasibility of this project if Briggs-Gridley was a…
Rare Agri-Products Ltd. is considering a new project with a projected life of seven (7) years. The project falls under the government’s subsidy program for encouraging local agricultural products and is eligible for a one-time rebate of 25% on any initial equipment installed for the project. The initial equipment (IE) will cost $41,000,000. An additional equipment (AE) costing $3,500,000 will be needed at the end of year 3. At the end of seven (7) years, the original equipment, IE, will have no resale value but the supplementary equipment, AE, can be sold for $50,000. A working capital of $1,350,000 will be needed.The project is forecast to generate sales of agri-products over the seven years as follows:Year 1 70,000 unitsYear 2 100,000 unitsYears 3-5 250,000 unitsYears 6-7 325,000 unitsA sale price of $150 per unit for the first two years is expected and then decline to $90 per unit thereafter as the newness of the product loses some sheen. The variable expenses will amount to 30% of…
6) New Brunswick Metalworks is evaluating a $100,000 polishing machine (CCA class 8). Services provided by the machine are expected to bring $15,000 per year in value over the next five years. Operating costs are expected to be $1,000 per year. Calculate the amount of taxes paid in each of the next five years of service life under the corporate tax rate of 40%.
Rare Agri-Products Ltd. is considering a new project with a projected Life of seven (7) years. The project falls under the government’s subsidy program for encouraging local agricultural products and is eligible for a one-time rebate of 25% on any initial equipment installed for the project. The initial equipment (IE) will cost $41,000,000. An additional equipment (AE) costing $3,500,000 will be needed at the end of year 3. At the end of seven (7) years, the original equipment, IE, will have no resale value but the supplementary equipment, AE, can be sold for $50,000. A working capital of $1,350,000 will be needed. The project is forecast to generate sales of agri-products over the seven years as follows: Year 1 70,000 units Year 2 100,000 units Year’s 3-5 250,000 units Year’s 6-7 325,000 units A sale price of $150 per unit for the first two years is expected and then decline to $90 per unit thereafter as the newness of the product loses some sheen. The variable expenses will amount to…
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A hospital wants to purchase a diagnostic system for $500,000 and depreciate it on a straight-line basis over a five year period for tax purposes. The investment would result in revenues of $225,000 per year, before taxes in Year 1, and increase at 3% for five years. At the end of five years, it is estimated that the system can be sold for $75,000. The gain on the sale would be taxable at the 40% corporate rate. The system also would require hiring two FTE techs to operate it, payable at a rate of $41,700 each per year and increase at a rate of 5% per year. Supply costs are expected to be $ 25,000 per year based on expected utilization and these costs are expected to increase at a rate of 4.2%. Miscellaneous overhead and other associated expenses are expected to be $10,000 per year and increase at a rate of 2% per year. Questions: Is the investment in the machine attractive in economic terms, given the projected cash flows? Please assume that the cash flows occur at the end of each…
Rare Agri-Products Ltd. is considering a new project with a projected life of seven (7)years. The project falls under the government’s subsidy program for encouraging local agricultural products and is eligible for a one-time rebate of 25% on any initial equipment installed for the project. The initial equipment (IE) will cost $41,000,000. At the end of year 1, An additional equipment (AE) costing $3,500,000 will be needed at the end of year 3. At the end of seven (7)years, the original equipment, IE, will have no resale value but the supplementary equipment, AE, can be sold for $50,000. A working capital of $1,350,000 will be needed.The project is forecast to generate sales of agri-products over the seven years as follows:Year 170,000 unitsYear 2100,000 unitsYears 3-5250,000 unitsYears 6-7325,000 unitsA sale price of $150per unitfor the first two years is expected and then decline to $90 per unitthereafter as the newness of the product loses some…
Rare Agri-Products Ltd. is considering a new project with a projected life of seven (7) years. The project falls under the government's subsidy program for encouraging local agricultural products and is eligible for a one-time rebate of 25% on any initial equipment installed for the project. The initial equipment (IE) will cost $41,000,000. An additional equipment (AE) costing $3,500,000 will be needed at the end of year 3. At the end of seven (7) years, the original equipment, IE, will have no resale value but the supplementary equipment, AE, can be sold for $50,000. A working capital of $1,350,000 will be needed. The project is forecast to generate sales of agri-products over the seven years as follows: Year 170,000 units Year 2 100,000 units Years 3-5 250,000 units Years 6-7 325,000 units A sale price of $150 per unit for the first two years is expected and then decline to $90 per unit thereafter as the newness of the product loses some sheen. The variable expenses will amount to…
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Comey Products has decided to acquire some new equipment having a $240,000 purchase price. The equipment will last 4 years and is in the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) The firm can borrow at a 5% rate and pays a 25% federal-plus-state tax rate. Comey is considering leasing the property but wishes to know the cost of borrowing that it should use when comparing purchasing to leasing and has hired you to answer this question. What is the correct answer to Comey's question? (Hint: Use the shortcut method to find the after-tax cost of the loan payments.) Do not round intermediate calculations. Round your answer to the nearest dollar.

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