Jones Car Wash is considering a new project whose data are shown below. The equipment that would be used has a 3-year taxlife, would be depreciated by the straight line method over the project's 3 year life, and would have zero salvage value. No newworking capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life.If the number of cars washed declined by 50% from the expected level, by how much would the project's NPV change? (Hint:Cash flows are constant in Years 1-3.)WACC 10%Net equipment cost (depreciableAnnual depreciationNumber of cars washedAverage price per carOperating costs excl. depr'nTax rate(A) -$74,781(B) -$78,385-$82,578(D) -$85,713E -$56,576basis)$20,00035%$60,0002,800$25$25,000

Net current benefits or NPV can be defined as the capital budgeting tool that investors usually use…

Answered: Jones Car Wash is considering a new…

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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In evaluating a project that costs $957,000, has a life of 13 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 153,000 units per year. Price per unit is $44, variable cost per unit is $24, and fixed costs are $958,914 per year. The tax rate is 24 percent, and we require a return of 12 percent on this project. 1a. Calculate the accounting break-even point. b. What is the degree of operating leverage and the accounting break even point? c. Calculate the base case cash flow 2a. Calculate the NPV b. What is the sensitivity of NPV to changes in the quantity sold c.What does the answer in 2b tells about a 500unit decrease in the quantity sold (NPV drop) d. What is the sensitivity of OCF to changes in the variable cost figures. e. How much will OCF change if Variable costs decrease by $1
You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphitelike material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the racket for 5 years. The equipment required for the project will be depreciated on a straight-line basis and has no salvage value. The required return for projects of this type is 14 percent and the company has a 22 percent tax rate. Market size Market share Pessimistic 127,000 Expected Optimistic 137,000 149,000 18% 22% 24% Selling price $ 146 $151 $155 Variable costs per $96 $92 $ 89 unit Fixed costs per year $ 968,000 $ 913,000 Initial investment $ 1,620,000 $ 1,470,000 $ 883,000 $1,450,000 Calculate the NPV for each case for this project. Assume a negative taxable income generates a tax credit. (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and…
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Outdoor Sports is considering adding a putt-putt golf course to its facility. The course would cost $168,000, would be depreciated on a straight-line basis over its 4-year life, and would have a zero salvage value. The sales would be $90,300 a year, with variable costs of $27,450 and fixed costs of $12,050. In addition, the firm anticipates an additional $15,700 in revenue from its existing facilities if the putt putt course is added. The project will require $2,650 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 11 percent and a tax rate of 21 percent?
Florida Car Wash is considering a new project whose data are shown below. The equipment to be used has a 3-year tax life. Under the new tax law, the equipment is eligible for 100% bonus depreciation, so it will be fully depreciated at t = 0. At the end of the project's 3 - year life, it would have zero salvage value. No change in net operating working capital (NOWC) would be required for the project. Revenues and operating costs will be constant over the project's life, and this is just one of the firm's many projects, so any losses on it can be used to offset profits in other units. If the number of cars washed declined by 40% from the expected level, by how much would the project's NPV change? (Hint: Note that cash flows are constant at the Year 1 level, whatever that level is.) Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC 10.0% Equipment cost $48,000 Number of cars washed 3,000 Average price per car $24.00 Fixed op. cost…
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…
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You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphitelike material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the racket for 6 years. The equipment required for the project will be depreciated on a straight-line basis and has no salvage value. The required return for projects of this type is 13 percent and the company has a 23 percent tax rate. Market size Market share Selling price Variable costs per unit Fixed costs per year Initial investment Pessimistic 113,000 19% $164 $ 106 $978,000 $ 1,968,000 Expected 123,000 23% $ 169 $ 102 $ 923,000 $1,818,000 Optimistic 135,000 25% $ 173 $ 99 $ 893,000 $ 1,798,000 Calculate the NPV for each case for this project. Assume a negative taxable income generates a tax credit. (A negative amount should be indicated by a minus sign. Do not round intermediate calculations…
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DeVault Services recently hired you as a consultant to help with its capital budgeting process. The company is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. The risk-adjusted cost of capital is 0.103. What is the project's NPV? Risk-adjusted cost of capital 0.103 Net investment cost (depreciable basis) $100,693 Straight-line deprec. rate 33.3333% Sales revenues, each year $95,500 Operating costs (excl. deprec.), each year $43,000 Tax rate 27.0%

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