Mortén customers to other sales? Discuss (no computations re a flows) Landcruisers Plus (LP) has I truck parts. As the name implies, t wota FJ40, which is known througho wess. The fact that Toyota stopped arket in 1982 meant that FJ40 owne arts to keep their beloved off-road replacing the original inline six-cy gine. The engine replacement requi train. LP's owners had been offerin ently decided to begin building the ould need to invest in a variety of s that the company will be able to nterest. The remaining funds woul stimates that it will be able to sell ld cost $1,000 each in cash expen: on expense of $70,000 per year or 5, the firm expects earnings before kes equal to 30 percent, which res 10-year expected life of the equip ash flow LP should expect to rece g that it does not require any other king capital and that the equipme age and book value? How shoulc DO loan be incorporated into the a = of return for its investments is 10 ted life what is the anticipated N
Mortén customers to other sales? Discuss (no computations re a flows) Landcruisers Plus (LP) has I truck parts. As the name implies, t wota FJ40, which is known througho wess. The fact that Toyota stopped arket in 1982 meant that FJ40 owne arts to keep their beloved off-road replacing the original inline six-cy gine. The engine replacement requi train. LP's owners had been offerin ently decided to begin building the ould need to invest in a variety of s that the company will be able to nterest. The remaining funds woul stimates that it will be able to sell ld cost $1,000 each in cash expen: on expense of $70,000 per year or 5, the firm expects earnings before kes equal to 30 percent, which res 10-year expected life of the equip ash flow LP should expect to rece g that it does not require any other king capital and that the equipme age and book value? How shoulc DO loan be incorporated into the a = of return for its investments is 10 ted life what is the anticipated N
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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Transcribed Image Text:Dakeu Clip UI-
UOCS IOt introduce the new product. How would the loss of chip
revenue due to the defection of Morten customers to other brands affect your
upuny
analysis of incremental sales? Discuss (no computations required).
(Determining relevant cash flows) Landcruisers Plus (LP) has operated an online
retail store selling off-road truck parts. As the name implies, the firm specializes in
parts for the venerable Toyota FJ40, which is known throughout the world for its
durability and off-road prowess. The fact that Toyota stopped building and export-
ing the FJ40 to the U.S. market in 1982 meant that FJ40 owners depended more and
more on remanufactured parts to keep their beloved off-road vehicles running. More
and more FJ40 owners are replacing the original inline six-cylinder engines with a
modern American-built engine. The engine replacement requires mating the new en-
gine with the Toyota drive train. LP's owners had been offering engine adaptor kits
for some time but have recently decided to begin building their own units. To make
the adaptor kits, the firm would need to invest in a variety of machine tools costing a
total of $700,000.
LP's management estimates that the company will
its bank and pay 8 percent interest. The remaining funds would have to be supplied
by LP's owners. The firm estimates that it will be able to sell 1.000 units a year for
$1.300 each. The units would cost $1,000 each in cash expenses to produce (this
does not include depreciation expense of $70,000 per year or interest expense of
$32,000). After all expenses, the firm expects earnings before interest and taxes of
$198,000. The firm pays taxes equal to 30 percent, which results in net income of
$138,600 per year over the 10-year expected life of the equipment.
able to borrow $400,000 from
a. What is the annual free cash flow LP should expect to receive from the invest-
ment in Year 1, assuming that it does not require any other investments in either
capital equipment or working capital and that the equipment is depreciated over a
10-year life to a zero salvage and book value? How should the financing cost as-
sociated with the $400.000 loan be incorporated into the analysis of cash flow?
b. If the firm's required rate of return for its investments is 10 percent and the invest-
ment has a 10-year expected life, what is the anticipated NPV of the investment?
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