Bhupatbhai KADS, Incorporated, has spent $400,000 on research to develop a new computer game. The firm is planning to spend $200,000 on amachine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated using bonusdepreciation; they total $50,000. The machine has an expected life of three years, a $75,000 estimated resale value, and falls underthe MACRS seven-year class life. Revenue from the new game is expected to be $600,000 per year, with costs of $250,000 per year.The firm has a tax rate of 21 percent, has an opportunity cost of capital of 15 percent, and expects net working capital to increase by$100,000 at the beginning of the project.What will the cash flows for this project be?Note: Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.YearFCF0123

Part 2: Explanation:Step 1: Calculate the initial investment:Initial investment = Research costs +…

Answered: KADS, Incorporated, has spent $400,000…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 4P

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Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given here. The company’s cost of capital is 10%. Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life? Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
Raghubhai
KADS, Incorporated, has spent $400,000 on research to develop a new computer game. The firm is planning to spend $200,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated using bonus depreciation; they total $50,000. The machine has an expected life of three years, a $75,000 estimated resale value, and falls under the MACRS seven-year class life. Revenue from the new game is expected to be $600,000 per year, with costs of $250,000 per year. The firm has a tax rate of 21 percent, has an opportunity cost of capital of 15 percent, and expects net working capital to increase by $100,000 at the beginning of the project. What will the cash flows for this project be? Note: Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.
KADS, Incorporated has spent $300,000 on research to develop a new computer game. The firm is planning to spend $100,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated using bonus depreciated; they total $40,000. The machine has an expected life of three years, a $65,000 estimated resale value, and falls under the MACRS seven-year class life. Revenue from the new game is expected to be $500,000 per year, with costs of $150,000 per year. The firm has a tax rate of 21 percent, has an opportunity cost of capital of 13 percent, and expects net working capital to increase by $50,000 at the beginning of the project. What will the cash flows for this project be? Note: Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. Year FCF $ 0 (190,000.00) Answer is complete but not entirely correct. 2 1 279,501.00 $ 281,643.00 3 390,706.00
KADS, Incorporated has spent $300,000 on research to develop a new computer game. The firm is planning to spend $100,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated using bonus depreciated; they total $40,000. The machine has an expected life of three years, a $65,000 estimated resale value, and falls under the MACRS seven-year class life. Revenue from the new game is expected to be $500,000 per year, with costs of $150,000 per year. The firm has a tax rate of 21 percent, has an opportunity cost of capital of 13 percent, and expects net working capital to increase by $50,000 at the beginning of the project. What will the cash flows for this project be? Note: Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. Year FCF 0 (190,000.00) ✔ X Answer is not complete. 1 2 $ 3 390,706.20
Bhupatbhai
KADS, Incorporated has spent $460,000 on research to develop a new computer game. The firm is planning to spend $260,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated using bonus depreciated; they total $56,000. The machine has an expected life of three years, a $81,000 estimated resale value, and falls under the MACRS seven-year class life. Revenue from the new game is expected to be $660,000 per year, with costs of $310,000 per year. The firm has a tax rate of 21 percent, has an opportunity cost of capital of 12 percent, and expects net working capital to increase by $130,000 at the beginning of the project. What will the cash flows for this project be? Note: Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. Year FCF 0 1 2 3
KADS, Incorporated has spent $450,000 on research to develop a new computer game. The firm is planning to spend $250,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated using bonus depreciated; they total $55,000. The machine has an expected life of three years, a $80,000 estimated resale value, and falls under the MACRS seven-year class life. Revenue from the new game is expected to be $650,000 per year, with costs of $300,000 per year. The firm has a tax rate of 21 percent, has an opportunity cost of capital of 13 percent, and expects net working capital to increase by $125,000 at the beginning of the project. What will the cash flows for this project be?
KADS, Inc. has spent $390,000 on research to develop a new computer game. The firm is planning to spend $190,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated using bonus depreciation; they total $49,000. The machine has an expected life of three years and a $74,000 estimated resale value. Revenue from the new game is expected to be $590,000 per year, with fixed costs of $240,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 13 percent, and it expects net working capital to increase by $95,000 at the beginning of the project. What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) Year 0 1 2 3 FCF

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