James invests Rs 200,000 in a Turbo Engine that will increase production of Holé Tubes. The Engine will be depreciated on a straight-line basis for four years such that salvage value will be equal to 0 on year 4. It is expected that sales will be equal to Rs 90,000 in year 1 and it is expected that it will increase by 15% up to year 4. There is only a fixed cost of 34,000 payable every year and change in net working capital is equivalent to 142. (a) Calculate the incremental cash flows for year 0 to 4 if the company is subject to a corporate tax rate of 15%. (b) Calculate the Net Present Value using the incremental cash flows calculated in (a) and advise whether James Bombs should invest in the new machine if the interest rate is 12%.

James invests Rs 200,000 in a Turbo Engine that will increase production of Holé Tubes. The Engine will be depreciated on a straight-line basis for four years such that salvage value will be equal to 0 on year 4. It is expected that sales will be equal to Rs 90,000 in year 1 and it is expected that it will increase by 15% up to year 4. There is only a fixed cost of 34,000 payable every year and change in net working capital is equivalent to 142. (a) Calculate the incremental cash flows for year 0 to 4 if the company is subject to a corporate tax rate of 15%. (b) Calculate the Net Present Value using the incremental cash flows calculated in (a) and advise whether James Bombs should invest in the new machine if the interest rate is 12%.

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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firm is considering purchasing a machine that costs $77,000. It will be used for six years, and the salvage value at that time is expected to be zero. The machine will save $41,000 per year in labor, but it will incur $16,000 in operating and maintenance costs each year. The machine will be depreciated according to five-year MACRS. The firm's tax rate is 35%, and its after-tax MARR is 18%. What is the present worth of the project?
ealthy Food Ltd is considering to invest in one of the two following projects to buy new machinery. Each option will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 7%. The cash flows of the projects are provided below. Machinery 1 Machinery 2 Cost $396,000 $415,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 123,000 194,000 205,000 215,000 228,000 196, 000 204,000 212,000 217,000 233,000 Required: Identify which option of machinery should the company accept based on the simple payback period method if the firm maintains a policy that every investment project should recover the initial investment within 2 years.
Maud'Dib Intergalactic has a new project available on Arrakis. The cost of the project is $36,000 and it will provide cash flows of $19,800, $25, 300, and $24, 200 over each of the next three years, respectively. Any cash earned in Arrakis is "blocked" and must be reinvested in the country for one year at an interest of 3.5 percent. The project has a required return of 8.5 percent. What is the project's NPV? Multiple Choice $19, 982.00 $22, 686.44 $31, 694.85 $28,575.27 $34, 576.20
GRIP Industries is considering a new assembly line costing RM1,600,000. The instaliation will ncur a cost of RM350,000 and after-tax training cost of RM105,000. The assembly line will be fuly depreciated using the simplified straight-ine method over its 3- year depreciable life. Net working capital is expected to increase by RM420,000 at start and the full amount ill be recovered at the end of up year 3. First year sales are estimated to be RM1,800,00, and illincrease by RM200,000 each year throughout the 3-year period. Variable cost is 55% from sales, while fixed cost takes up RM225,000 per year. At terminal, the assembly line can be sold at RM700,000. GRIP is in the 35 percent tax bracket and has a required rate of returm of 12% A) Calculate the total initial outlay of the project. B) Determine the annual cash flow for the project from year 1 to year 3. C) Calculate the terminal cash flow at year 3. D) Calculate the net present value (NPV) and intermal required rate of return (IRR)…
A computer system can be purchased for $18,000. The operating costs will be $10,000 per year, and the useful life is expected to be 5 years with a $5,000 salvage value at that time. The present annual sales volume should increase by $16,000 as a result of acquiring the system. Assume the company's tax rate is 50%. Using a straight-line deprecation method, compute annual taxes and IRR for the investment. Rework the previous problem assuming (i) the system's taxable life is 8 years with a salvage value of $2,000, but that (ii) the company still salvages the system after 5 years for $5,000. Describe how this may affect cash flow in the forthcoming years.
Allan buys a cellphone costing Php. 13,000. What is its value after 4 years if the rate of depreciation is 20% per annum?
A man invests in a project that requires a fixed capital of P 2.5 M with no salvage, and life of 12 years. During its life an estimated maintenance cost of P 280, 000 will be spent each year. Taxes and insurance will be 5 % of the first cost. The project will yield a uniform annual revenue of P 1M. The company expects to earn 20% before income taxes. Compute the rate of return. Select one: a. 8.38% b. 6.54% c. 5.65% d. 7.12%
A "standard" model of a dozer costs $20,000 and has an annual operating expense of $450. The dozer will be replaced in 6 years when the salvage value is expected to be $2,000. A "super" model can be purchased for $25,000, but will have a salvage value of $7,000 when retired in 6 years. Its operating expenses are also $450 a year. The purchaser's other investment opportunities are 5%. Compare these alternatives by using the annual equivalent method.
XXXX Contractors are preparing to replace critical earthmoving plants and equipment so that they can consolidate future bids. The anticipated cost of the digger with a maximum-sized bucket is £85,000. It needs to be bought in 4 years’ time. However, the industrial development fund is willing to loan XXXX contractors at a rate of 12% per annum if they can purchase the digger today. The accountant thinks there is a possibility of outright purchase of the digger in 4 years’ time if the company can create a sinking fund at a rate of 6% per annum Task: Explain how the financial health of XXXX contractors is able to influence the decision of outright purchase using a loan today or the creation of a sinking fund for the next 4 years
Bunnings Ltd is considering to invest in one of the two following projects to buy a new equipment. Each equipment will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 8%. The cash flows of the projects are provided below. Equipment 1 Equipment 2 Cost $186000 $195000 Future Cash Flow Year 1 86000 97000 Year 2 93000 84000 Year 3 83000 86000 Year 4 75000 75000 Year 5 55000 63000 Required:a) Identify which option of equipment should the company accept based on Profitability Index? b) Identify which option of equipment should the company accept based on discounted pay back method if the payback criterion is maximum 2 years?
Margaret has a project with a $30560 first cost that returns $4320 per year over its 10-year life. It has a salvage value of $3000 at the end of 10 years. If the MARR is 5 percent, what is the payback period of this project if cash flow is continuous?
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