pm Medavoy Company is considering a new project that complements its existing business.The machine required for the project costs $4.3 million. The marketing departmentpredicts that sales related to the project will be $2.71 million per year for the next fouryears, after which the market will cease to exist. The machine will be depreciated to zeroover its 4-year economic life using the straight-line method. Cost of goods sold andoperating expenses related to the project are predicted to be 30 percent of sales. Thecompany also needs to add net working capital of $170,000 immediately. The additionalnet working capital will be recovered in full at the end of the project's life. The corporatetax rate is 24 percent and the required return for the project is 13 percent. What is thevalue of the NPV for this project? (Do not round intermediate calculations and enteryour answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,1,234,567.89.)✓ Answer is complete but not entirely correct.NPV$1,150,309.95 ×

To calculate the Net Present Value NPVNPV of the project, we need to determine the cash flows…

Answered: Medavoy Company is considering a new…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 10P

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Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $190,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $87,000 per year; and Machine 360-6, which has a cost of $360,000, a 6-year life, and after-tax cash flows of $98,300 per year. Knitting machine prices are not expected to rise because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Filkins’ cost of capital is 14%. Should the firm replace its old knitting machine? If so, which new machine should it use? By how much would the value of the company increase if it accepted the better machine? What is the equivalent annual annuity for each machine?
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost 17 million, and production and sales will require an initial 5 million investment in net operating working capital. The companys tax rate is 40%. a. What is the initial investment outlay? b. The company spent and expensed 150,000 on research related to the new product last year. Would this change your answer? Explain. c. Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for 1.5 million after taxes and real estate commissions. How would this affect your answer?
Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at 860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to produce cash operating savings of 225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%. Required: 1. Compute the NPV of the new system. 2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was 60,000 more than expected due to higher installation costs, and (2) the annual cost savings were 20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available one year ago. Did the company make the right decision? 3. CONCEPTUAL CONNECTION Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal audit department indicating that cash inflows also had increased by a net of 60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2. 4. CONCEPTUAL CONNECTION Why is a postaudit beneficial to a firm?
Although the Chen Company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It would have zero salvage value at the end of its life. The project cost of capital is 10%, and its marginal tax rate is 25%. Should Chen buy the new machine?
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Bhupatbhai
Medavoy Company is considering a new project that complements its existing business. The machine required for the project costs $4.65 million. The marketing department predicts that sales related to the project will be $2.68 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated to zero over its 4-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales. The company also needs to add net working capital of $205,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 21 percent and the required return for the project is 12 percent. What is the value of the NPV for this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
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Bronco Co. is considering a new project that complements its existing business. The machine required for the project costs $3.65 million. The marketing department predicts that sales related to the project will be $2.65 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated to zero over its four-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 40 percent (the 40 percent represents both COGS and Op. Exp.) of sales. The company also needs to add net working capital of $175,000 mmediately. The additional net working capital will be recovered in full at the end of the project's life. The corporate tax rate is 22 percent and the required return for the project is 12 percent. Should the company proceed with the
Thurston Petroleum is considering a new project that complements its existing business. The machine required for the project costs $4.35 million. The marketing department predicts that sales related to the project will be $2.45 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated to zero over its 4-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales. The company also needs to add net working capital of $175,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The tax rate is 25 percent and the required return for the project is 10 percent. What is the value of the NPV for this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

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