Elmdale Enterprises is deciding a project of whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars): Revenues Costs of goods sold and operating expenses other than depreciation Depreciation Increase in net working capital Capital expenditures Marginal corporate tax rate Year 1 106.5 47.7 25.9 3.1 29.1 40% Year 2 159.9 59.5 35.5 7.6 43.8 40% a. What are the incremental earnings for this project for years 1 and 2? b. What are the free cash flows for this project for the first two years? c. If the project requires an initial investment of $10 million with the cost of capital of 10%, what is the NPV of this project? Should the firm accept the project?

Elmdale Enterprises is deciding a project of whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars): Revenues Costs of goods sold and operating expenses other than depreciation Depreciation Increase in net working capital Capital expenditures Marginal corporate tax rate Year 1 106.5 47.7 25.9 3.1 29.1 40% Year 2 159.9 59.5 35.5 7.6 43.8 40% a. What are the incremental earnings for this project for years 1 and 2? b. What are the free cash flows for this project for the first two years? c. If the project requires an initial investment of $10 million with the cost of capital of 10%, what is the NPV of this project? Should the firm accept the project?

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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The following tables contain financial statements for Dynastatics Corporation. Although the company has not been growing, it now plans to expand and will increase net fixed assets (i.e., assets net of depreciation) by $350,000 per year for the next 4 years, and it forecasts that the ratio of revenues to total assets will remain at 1.50. Annual depreciation is 20% of net fixed assets at the beginning of the year. Fixed costs are expected to remain at $86 and variable costs at 70% of revenue. The company’s policy is to pay out one-half of net income as dividends and to maintain a book debt ratio of 20% of total capital. INCOME STATEMENT, 2019(Figures in $ thousands) Revenue $ 2,160 Fixed costs 86 Variable costs (70% of revenue) 1,512 Depreciation 280 Interest (6% of beginning-of-year debt) 18 Taxable income 264 Taxes (at 35%) 92 Net income $ 172 Dividends $ 86 Addition to retained…
7. A company that makes clutch disks had the cash flows shown below for one department with a MARR of 25%. Calculate the rate of return by using return on invested capital approach with a reinvestment rate of 15% per year. Should the company continue to make clutch disks? Year Cash Flow, $ Ft 1500 1 -1800 2 600 -570 3.
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Nugent Communication Corp. is investing $8,501,547 in new technologies. The company expects significant benefits in the first three years after installation (as can be seen by the following cash flows), and smaller constant benefits in each of the next four years. Year 1 2 3 4-7 Cash Flows $1,736,907 $4,841,362 $2,794,697 $1,009,125 What is the discounted payback period for the project assuming a discount rate of 10 percent?
Etobicoke Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars): Revenues Operating Expenses (other than depreciation) CCA Increase in Net Working Capital Capital Expenditures Marginal Corporate Tax Rate Year 1 128.5 47.2 29.9 3.1 28.7 35% Year 2 155.5 63.7 34.1 8.9 41.6 35% a. What are the incremental earnings for this project for years 1 and 2? (Note: Assume any incremental cost of goods sold is included as part of operating expenses.) b. What are the free cash flows for this project for the first two years?
Required: The MoMi Corporation's cash flow from operations before interest and taxes was $2.3 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 17% of pretax cash flow each year. The tax rate is 21%. Depreciation was $290,000 in the year just ended and is expected to grow at the same rate as the operating cash flow. The appropriate market capitalization rate for the unleveraged cash flow is 12% per year, and the firm currently has debt of $5 million outstanding. Use the free cash flow approach to calculate the value of the firm and the firm's equity. (Enter your answer in dollars not in millions.) Value of the firm Value of the firm's equity
Steber Packaging Inc. expects sales next year of $42 million. Of this total, 30 percent is expected to be for cash and the balance will be on credit, payable in 30 days. Operating expenses are expected to total $27 million. Accelerated depreciation is expected to total $8 million, although the company will only report $4 million of depreciation on its public financial reports. The marginal tax rate for Steber is 34 percent. Current assets now total $28 million and current liabilities total $15 million. Current assets are expected to increase to $33 million over the coming year. Current liabilities are expected to increase to $17 million. Compute the projected after-tax operating cash flow for Steber during the coming year. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $ million
A firm is considering a new inventory system that will cost $120,000. The system is expected to generate positive cash flows over the next four years in the amounts of $35,000 in year 1, $55,000 in year 2, $65,000 in year 3, and $40,000 in year 4. The firm’s required rate of return is 9%. What is the payback period of this project? 1.95 years 2.46 years 2.99 years 3.10 years Based on the information from Question 47. What is the net present value (NPV) of the project? $28,830.29 $30,929.26 $36,931.43 $39,905.28 Based on the information from Question 47, what is the internal rate of return (IRR) of this project? 14.03% 17.56% 19.26% 21.78% Based on the information from Question 47, what is the profitability index (PI) of this project? 0.87 1.11 1.31 1.83.
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The Purple Lion Beverage Company expects the following cash flows from its manufacturing plant in Palau over the next five years: Year 1 $250,000 Annual Cash Flows Year 2 $20,000 Year 3 Year 4 $180,000 $450,000 Year 5 $550,000 The CFO of the company believes that an appropriate annual interest rate on this investment is 4%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar?
2. Incremental costs - Initial and terminal cash flow Consider the case of Marston Manufacturing Company: Marston Manufacturing Company is considering a project that requires an investment in new equipment of $3,780,000. Under the new tax law, the equipment is eligible for 100% bonus depreciation at t = 0 so the equipment will be fully depreciated at the time of purchase. Marston estimates that its accounts receivable and inventories need to increase by $720,000 to support the new project, some of which is financed by a $288,000 increase in spontaneous liabilities (accounts payable and accruals). The company's tax rate is 25%. The after-tax cost of Marston’s new equipment is . Marston’s initial net investment outlay is . Suppose Marston’s new equipment is expected to sell for $600,000 at the end of its four-year useful life, and at the same time, the firm expects to recover all of its net operating working capital (NOWC) investment. Remember, that under the…

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