Finance . It is necessary to evaluate the profitability of proposed improvements to a process prior toobtaining approval to implement changes. For one such process, the capital investment (end ofyear 0) for the project is $250,000. There is no salvage value. In years 1 and 2, you expect togenerate an after-tax revenue from the project of $60,000/y. In years 3-8, you expect to generatean after-tax revenue of $50,000/y. Assume that the investments and cash flows are singletransactions occurring at the end of the year. Assume an effective annual interest rate of 9%.a. Draw a discrete cash flow diagram for this project.b. Draw a cumulative, discounted (to year 0) cash flow diagram for this project.c. What is the future value of this project at the end of year 8?d. Instead of investing in this project, the $250,000 could remain in the company's portfolio.What rate of return on the portfolio is needed to equal the future value of this project at the endof year 8? Would you invest in the project, or leave the money in the portfolio?

The future value represents the expected worth of the present series of cash flows. It is estimated…

Answered: It is necessary to evaluate the…

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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Mountain Frost is considering a new project with an initial cost of $205,000. The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. The projected net income for each year is $20,000, $20,900, $24,600, and $16,900, respectively. What is the average accounting return? Please make sure its correct
A proposed project requires an investment of $215,000 and will require an additional $25,000 for upgrades in year six. The income from the project is expected to be $64,000 in years one through five and $52,000 in years seven and eight. In year six, revenue equaled expenses (exclusive of the $25,000 spent for upgrades). There is no salvage value. If the external reinvestment rate (ε) of 6% is available, what is the rate of return for this project using the ERR method?
Foley Systems is considering a new project whose data are shown below. Under the new tax law, the equipment for the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t = 0. After the project's 3-year life, the equipment would have zero salvage value. The project would require additional net operating working capital (NOWC) that would be recovered at the end of the project's life. Revenues and operating costs are expected to be constant over the project's life. What is the project's NPV? (Hint: Cash flows from operations are constant in Years 1 to 3.) Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC Equipment cost 10.0% $58,000 Required net operating working capital (NOWC) $17,000 Annual sales revenues $72,000 Annual operating costs $30,000 Tax rate 25.0% a. $5,063 b. $34,836 c. $36,108 d. $30,608 e. $33,472
Foley Systems is considering a new project whose data are shown below. Under the new tax law, the equipment for the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t = 0. After the project's 3-year life, the equipment would have zero salvage value. The project would require additional net operating working capital (NOWC) that would be recovered at the end of the project's life. Revenues and operating costs are expected to be constant over the project's life. What is the project's NPV? (Hint: Cash flows from operations are constant in Years 1 to 3.) Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC 10.0% Equipment cost $75,000 Required net operating working capital (NOWC) $15,000 Annual sales revenues $73,000 Annual operating costs $25,000 Tax rate 25.0% Question options: $2,549 $18,970 $4,571…
Spotted Potato is evaluating project A, which would require the purchase of a piece of equipment for $550,000. During year 1, project A is expected to have relevant revenue of $312,000.00, relevant costs of $105,000.00, and some depreciation. Spotted Potato would need to borrow $550,000 for the equipment and would need to make an interest payment of $40,000 to the bank in year 1. Relevant net income for project A in year 1 is expected to be $96000.00 and operating cash flows for project A in year 1 are expected to be $167000.00. Straight-line depreciation would be used. What is the tax rate expected to be in year 1? 29.41% (plus or minus 3 bps) 13.51% (plus or minus 3 bps) 70.59% (plus or minus 3 bps) 34.53% (plus or minus 3 bps) none of the answers are within 3 bps of the correct answer
Mountain Frost is considering a new project with an initial cost of $180,000. The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. The projected net income for each year is $19,500, $20,400, $24,600, and $16,400, respectively. What is the average accounting return?
A proposed project requires an investment of $250,000 and will require an additional $60,000 for upgrades in year five. The income from the project is expected to be $65,000 in years one through four and $50,000 in years six through seven. In year five, revenue to be in ye of the $60,000 spent for upgrades). There is not salvage value. If the external reinvestment rate of 8% is available, what is the rate of return for this project using the ERR method? $250,000 $65,000 $65,000 $65,000 $65,000 TITT $60,000 $50,000 $50,000
A new piece of equipment has a first cost of $300,000 with no salvage value. It will generate annual revenues of $80,000, annual expenses of $40,000, and has a recovery period of 10 years. a) Using Straight-Line Depreciation, an effective tax rate of 20%, and a MARR of 10%, construct a complete income statement. b) What is the NPV of this project?
Clemson Software is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's Year 1 cash flow? Equipment cost (depreciable basis) $77,000 Straight-line depreciation rate 33.333% Sales revenues, each year $70,000 Operating costs (excl. depr.) $28,000 Tax rate 35.0% $36,800 $36,772 $36,993 $35,990 $36,283
Isle Royale Solutions is considering a project that would have a eight-year life and would require a $2,904,000 investment in equipment. At the end of eight years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows (Ignore income taxes.): Use the documents provided in the instructions to determine the appropriate discount factor(s). All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 11%. Compute the project's net present value. Compute the project's internal rate of return. Compute the project's simple rate of return. Compute the project's payback period. Isle Royale Solutions is considering a project that would have a eight-year life and would require a $2,904,000 investment in equipment. At the end of eight years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income…
Mountain Frost is considering a new project with an initial cost of $295,000. The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. The projected net income for each year is $21,800, $22,700, $24,600, and $18,700, respectively. What is the average accounting return? Multiple Choice O 13.64% O 14.88% 7.44% O 11.16% 15.94%
A 5-year project is estimated to cost $700,000 and have no residual value. If the straight-line depreciation method is used and estimated total income is $231,000, determine the average rate of return giving effect to depreciation on the investment. Round your percentage answer to one decimal place (for example, a value of .1048 rounds to 10.5%).fill in the blank 1 %

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