The firm is formed to purchase and operate a vehicle. The purpose of the vehicle is to operate a taxi service for one year. The life of the vehicle is only one year, after which time the vehicle is worthless. The debt will be repaid with interest and the firm will be shut down and capital returned to shareholder at year end. The firm is contemplating the following: Vehicle acquisition cost $ 30,000 Years of useful life (economic life) 1 Tax rate 20% Required rate of return on equity 10% Required return on debt 5% Debt ratio 50% Annual revenues $ 145,000 Operating expenses (excluding depreciation) $ 100,000 Part B: PROJECT RISK ANALYSIS (sensitivity to base case assumptions): using base case sales, and 9.5% operating margin, and also 10.5% operating margin; Do likewise using base case values; with sales 5% lower than base case, and also 5% higher than base case. Report the highest NPV and the lowest NPV values. How different are these than the base case NPV?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

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Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 5PA: Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated...

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The firm is formed to purchase and operate a vehicle. The purpose of the vehicle is to operate a taxi service for one year. The life of the vehicle is only one year, after which time the vehicle is worthless. The debt will be repaid with interest and the firm will be shut down and capital returned to shareholder at year end. The firm is contemplating the following: Vehicle acquisition cost                                                     $ 30,000 Years of useful life (economic life)                                      1 Tax rate                                                                             20% Required rate of return on equity                                    10% Required return on debt                                                     5% Debt ratio                                                                          50% Annual revenues                                                         $ 145,000 Operating expenses (excluding depreciation)…
The firm is formed to purchase and operate a vehicle. The purpose of the vehicle is to operate a taxi service for one year. The life of the vehicle is only one year, after which time the vehicle is worthless. The debt will be repaid with interest and the firm will be shut down and capital returned to shareholder at year end. The firm is contemplating the following: Vehicle acquisition cost                                                     $ 30,000 Years of useful life (economic life)                                      1 Tax rate                                                                             20% Required rate of return on equity                                    10% Required return on debt                                                     5% Debt ratio                                                                          50% Annual revenues                                                         $ 145,000 Operating expenses (excluding depreciation)…
The firm is formed to purchase and operate a vehicle. The purpose of the vehicle is to operate a taxi service for one year. The life of the vehicle is only one year, after which time the vehicle is worthless. The debt will be repaid with interest and the firm will be shut down and capital returned to shareholder at year end. The firm is contemplating the following: Vehicle acquisition cost                                                     $ 30,000 Years of useful life (economic life)                                      1 Tax rate                                                                             20% Required rate of return on equity                                    10% Required return on debt                                                     5% Debt ratio                                                                          50% Annual revenues                                                         $ 145,000 Operating expenses (excluding depreciation)…
The firm is formed to purchase and operate a vehicle. The purpose of the vehicle is to operate a taxi service for one year. The life of the vehicle is only one year, after which time the vehicle is worthless. The debt will be repaid with interest and the firm will be shut down and capital returned to shareholder at year end. The firm is contemplating the following: Vehicle acquisition cost                                                     $ 30,000 Years of useful life (economic life)                                      1 Tax rate                                                                             20% Required rate of return on equity                                    10% Required return on debt                                                     5% Debt ratio                                                                          50% Annual revenues                                                         $ 145,000 Operating expenses (excluding depreciation)…
The firm is formed to purchase and operate a vehicle. The purpose of the vehicle is to operate a delivery service for one year. The life of the vehicle is only one year, after which time the vehicle is worthless. The debt will be repaid with interest and the firm will be shut down and capital returned to shareholder at year end. The firm is contemplating the following (base case): Vehicle acquisition cost                                                       $ 48,000 Years of useful life (economic life)                                               1 Tax rate                                                                                            25% Required rate of return on equity                                           11% Required return on debt                                                             6% Debt ratio                                                                                    40% Annual revenues…
The firm is formed to purchase and operate a vehicle. The purpose of the vehicle is to operate a delivery service for one year. The life of the vehicle is only one year, after which time the vehicle is worthless. The debt will be repaid with interest and the firm will be shut down and capital returned to shareholder at year end. The firm is contemplating the following (base case): Vehicle acquisition cost                                                       $ 48,000 Years of useful life (economic life)                                               1 Tax rate                                                                                            25% Required rate of return on equity                                           11% Required return on debt                                                             6% Debt ratio                                                                                    40% Annual revenues…
The firm purchases a vehicle with equity capital only, no debt. The purpose of the vehicle is to operate a taxi service for one year. This is the problem as we worked in class, but now the life of the vehicle is only one year, after which time the vehicle is worthless. Also some of the other values are different. The firm is contemplating the following: Vehicle acquisition cost $30,000 Years of useful life (economic life) 1 Tax rate0% Required rate of return on equity10% Annual revenues$ 145,000 Operating expenses (excluding depreciation)$ 100,000 Tips: 1.Depreciate straight-line over the year of useful life,down to $0 over one year. 2. The maximum dividend is paid annually. 3. Ignore any working capital effects. 4. Capital charge will be based on the assets at the beginning of each year. Please include in the analysis: P&L - OCF analysis EVA analysis Does this project deserve consideration? How much wealth, if any, will it create?
JBL Co. has designed a new conveyor system. Management must choose among three alternative courses of action: (1) The firm can sell the design outright to another corporation with payment over 2 years. (2) It can license the design to another manufacturer for a period of 5 years, its likely product life. (3) It can manufacture and market the system itself; this alternative will result in 6 years of cash inflows. The company has a cost of capital of 11.4%.Cash flows associated with each alternative are as shown in the following table. Alternative Sell License Manufacture Initial investment (CF0) $199,000 $200,600 $449,000 Year (t ) Cash inflows (CFt) 1 $199,500 $250,600 $200,300 2 250,400 100,700 255,000 3 — 79,700 200,300 4 — 59,700 200,300 5 — 40,500 200,300 6 — —…
Falkland, Inc., is considering the purchase of a patent that has a cost of $49,000 and an estimated revenue producing life of 4 years. Falkland has a cost of capital of 10%. The patent is expected to generate the following amounts of annual income and cash flows: https://openstax.org/books/principles-managerial-accounting/pages/time-value-of-money A. What is the NPV of the investment? Round your present value factor to three decimal places and final answer to the nearest dollar. $ _____ B. What happens if the required rate of return increases? If the required rate of return increases, ______
You are evaluating the proposed acquisition of a new machine costing $57,000, and it falls into the MACRS 3-year class. Purchase of the machine would require an increase of net operating working capital of $4,000, which will be recovered when the machine is sold. The machine would increase the firm's revenues by $30,000 per year and its operating costs by $17,000 per year. The machine is expected to be used only for 3 years and then be sold for $25,000. The firm's marginal tax rate is 27 percent, and the project's cost of capital is 14 percent. What is the non-operating terminal cash flows at year 3? MACRS 3-year schedule is as follows: 33%, 45%, 15%, and 7% for years 1 to 4, respectively. Question 13 options: $22,267 $22,587 $22,907 $23,097 $23,327 $23,607
You are evaluating the proposed acquisition of a new machine costing $63,000, and it falls into the MACRS 3-year class. Purchase of the machine would require an increase of net operating working capital of $5,000, which will be recovered when the machine is sold. The machine would increase the firm's revenues by $28,000 per year and its operating costs by $15,000 per year. The machine is expected to be used only for 3 years and then be sold for $30,000. The firm's marginal tax rate is 32 percent, and the project's cost of capital is 14 percent. What is the net cash flow at t=0, i.e., the initial cash flow?
You are evaluating the proposed acquisition of a new machine costing $54,000, and it falls into the MACRS 3-year class. Purchase of the machine would require an increase of net operating working capital of $4,000, which will be recovered when the machine is sold. The machine would increase the firm's revenues by $20,000 per year and its operating costs by $10,000 per year. The machine is expected to be used only for 3 years and then be sold for $25,000. The firm's marginal tax rate is 27 percent, and the project's cost of capital is 14 percent. What is the net cash flow at t=0, i.e., the initial cash flow? Question 9 options: $51,000 $56,000 $58,000 $63,000 $65,000 $67,000

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