Mike Mulligan wants to expand his heavy equipment business into excavation. He plans to buy aused excavator for $300,000. The excavator requires an inventory of spare parts worth $10,000. These investments will occur immediately. Mulligan will operate the excavationbusiness for two years and expects EBITDA of $200,000 at the end of each year. He will closehis business at the end of the second year, sell the equipment for $100,000 and liquidate theinventory of spare parts. Mulligan pays a tax rate of 25%. Using this information, compute theappropriate values for operating cash flow, investments in net working capital, CAPEX and freecash flow for each year of the project.

Initial Investments (Year 0):Purchase of excavator: -$300,000Inventory of spare parts: -$10,000Total…

Answered: Mike Mulligan wants to expand his heavy…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Cullumber, Inc. is considering the purchase of a warehouse directly across the street from its manufacturing plant. Cullumber currently warehouses its inventory in a public warehouse across town. Rent on the warehouse and delivering and picking up inventory cost Cullumber $50880 per year. The building will cost Cullumber $477000. Cullumber will depreciate the building for 20 years. At the end of 20 years, the building will have a $132500 salvage value. Cullumber's required rate of return is 12%. Click here to view the factor table. Using the present value tables, the building's net present value is (round to the nearest dollar) O $1017600. O $46077. O $393783. O $-83217.
The owner of a pizza restaurant needs to buy a new pizza oven for the restaurant. The oven costs $450, is expected to last 5 years, and will be depreciated using the straight line method. If the total cash inflows from the new oven are constant at $750 for the next 5 years, and the total cash outflows are constant at $380 for the next 5 years, determine the cash flow for the pizza restaurant in the second year assuming the tax rate is 34%. $ Place your answer in dollars and cents.
Denny Kean owns a very profitable ice cream stand. Based on the results of a $6,600 marketing researchproject, Denny is now considering adding a line of frozen yogurt to his product mix.Denny expects that the machine necessary to produce the yogurt will cost $130,000, last for five years andhave a salvage value of $10,000 at the end of the fifth year. For tax purposes, Denny will depreciate theyogurt machine over the five years to a zero salvage value using the straight-line method.Denny will incur extra annual fixed costs of $1,500 per year if he acquires this machine, while his variablecosts (the cone/cup, yogurt, wrapping paper, spoons, etc.) will be $0.50 per serving. He expects to sell100 servings a day (365 days in a year) at a price per serving to be determined. The annual rent on hisstand under the existing noncancelable lease (with ten years remaining) is $18,000 per year, with built-inannual increases to cover inflation (expected to be 3% annually).The relevant income tax…
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You own a coal mining company and are considering opening a new mine. The mine will cost $119.5 million to open. If this money is spent immediately, the mine will generate $21.5 million for the next 10 years. After that, the coal will run out and the site must be cleaned and maintained at environmental standards. The cleaning and maintenance are expected to cost $1.6 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is 7.6%, what does the NPV rule say? NPV ($ mil पात 10 15 et Discount Rate (%) What does the IRR rule say about whether you should accept this opportunity? (Select the best choice below.) A. Accept the opportunity because the IRR is greater than the cost of capital. B. There are two IRRS, so you cannot use the IRR as a criterion for accepting the opportunity. O C. Reject the opportunity because the IRR is lower than the 7.6% cost of capital. D. The IRR is r= 11.46%, so accept the opportunity.…
Gibson Corporation’s balance sheet indicates that the company has $580,000 invested in operating assets. During the year, Gibson earned operating income of $67,280 on $1,160,000 of sales. Required Compute Gibson’s profit margin for the year. Compute Gibson’s turnover for the year. Compute Gibson’s return on investment for the year. Recompute Gibson’s ROI under each of the following independent assumptions:(1) Sales increase from $1,160,000 to $1,392,000, thereby resulting in an increase in operating income from $67,280 to $76,560.(2) Sales remain constant, but Gibson reduces expenses, resulting in an increase in operating income from $67,280 to $69,600.(3) Gibson is able to reduce its invested capital from $580,000 to $464,000 without affecting operating income.
Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would cost $7,530 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $6,070 and $850, respectively.Alternatively, Mr. Fitch could purchase for $9,960 the equipment necessary to serve cappuccino. That equipment has an expected useful life of four years and no salvage value. Additional annual cash revenues and cash operating expenses associated with selling cappuccino are expected to be $8,440 and $2,350, respectively.Income before taxes earned by the ice cream parlor is taxed at an effective rate of 20 percent.Required Determine the payback period and unadjusted rate of return (use average investment) for each…

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