EconomicsDr. P is looking to supplement his income by doing some 'development' on Second Street. If hisMARR is 10%, which alternative should he pursue? Use any method you wish of the 'Big 3' tocalculate which alternative is the best at MARR of 10%.BreweryBBQRaveInitial cost$50,000 $100,000 $12,000Annual benefit10000150005000Salvage value2500035000-5000Life6 yearsO RaveO BBQBreweryO None of the Above

NPV is the most used method of capital budgeting and selection of optimal projects based on the time…

Answered: Initial cost Annual benefit Salvage…

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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Compare three alternatives on the basis of their capitalized costs at i = 13% per year and select the best alternative. Alternative E F G First Cost $-85,000 $-325,000 $-825,000 AOC, per Year $-65,000 $-20,000 $-6,000 Salvage Value $25,000 $75,000 $500,000 Life, Years 2 4 ∞ The capitalized cost of alternative E is $ , alternative F is $ , and alternative G is $ . The best alternative is E G F .
RR
Estimated sales Sales Price per can Cost per can Estimated life Fixed costs Tax rate Initial equipment cost Initial equipment cost will be linearly depreciated over 4 year life with $10,000 salvage value Investment in NWC 50,000 cans $6.00 $3.00 4 years $10,000/year $100,050 $196,500 $116,000 $153,200 $90,000 Cost of capital What is the operating cash flow? $20,000 20% 10%
Initial investment Pretax salvage value Cost savings per year 535,000 30,000 150,000 Cost savings per year 100,000 Working capital reduction $ 60,000 Annual depreciation charge $ Aftertax salvage value 6969 107,000 22,800 Tax rate Required return *Depreciation straight-line over life 24% 11% 5 Output area: $ NPV 150,000 cost savings $ 100,000 Year Cash flow Year 0 $ (475,000) 0 $ 1 139,680 1 2 139,680 3 139,680 4 139,680 5 102,480 2345 Accept/Reject Required pretax cost savings: NPV w/o OCF Required OCF OCF less dep. tax shield Cost savings 69 69 69 $ (497,076.39) $ 134,494.11 $ 108,814.11 cost savings Cash flow (475,000) 101,680 101,680 101,680 101,680 64,480
An engineer has received two bids for an elevator to be installed in a new building. Given a 10% interest rate, which bid should be accepted? Alternatives Installed cost Annual cost Salvage value Life, in years Westinghome $45,000 2700 3000 10 Itis $54,000 2850 4500 15
Cost of new equipment: $200,000 Installation: $20,000 Change in Net Operating Working Capital: $50,000 New sales per year: $115,000 New operating costs per year: $50,000 Economic life: 4 years Depreciable life: MACRS 3-year class (33%, 45%, 15%, 7%) Salvage value: $20,000 Tax Rate: 25% WACC: 9% What is the total initial investment outlay (FCF0)? What is the operating cash flow for year 2, or FCF2? (SHOW ALL WORK/STEPS) What are the planned non-operating cash flows in year 4 (i.e. terminal cash flows)? (SHOW ALL WORK/STEPS) What is the book value of the equipment after three years?

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Initial cost Annual benefit Salvage value Life O Rave O BBQ Brewery Brewery BBQ $50,000 10000 25000 6 years Rave $100,000 $12,000 15000 5000 35000 -5000