Mrs. Bean is considering adding a machine to her operation. The machine she wants would cost $35,000, wouldbe depreciated on a straight line basis over the 4-year life, and would have zero salvage value. Bean estimates theincome from the machine would be $33,000 a year with $12,000 of that amount being variable cost. The fixed costwould be $7,250. Bean feels that the machine would net her, after costs, an additional $10,000 in revenue from heroperation. The project will require $1,000 of net working capital which is recoverable at the end of the project Whatis the net present value of this project at a discount rate 12% and a tax rate of 21% ?O a. $28,510.97O b. $26,840.43O c. $27,390.19O d. $23,487.72

NPV is the time value based method of capital budgeting and can be calculated as the difference…

Answered: Mrs. Bean is considering adding a…

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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Chadron Sports is considering adding a miniature golf course to its facility. The course would cost $138,000, would be depreciated on a straight-line basis over its five-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $72,000 a year with $24,000 of that amount being variable cost. The fixed cost would be $11,600. In addition, the firm anticipates an additional $14,000 in revenue from its existing facilities if the golf course is added. The project will require $7,000 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 12 percent and a tax rate of 34 percent? O $14,438.78 $12,708.48 O $11,757.49 O $10,631.16 O $14,900.41
Fun Land is considering adding a miniature golf course to its facility. The course would cost $75000, would be depreciated on a straight line basis over its 4-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $40000 a year with $12000 of that amount being variable cost. The fixed cost would be $6000. In addition, the firm anticipates an additional $15000 in revenue from its existing facilities if the course is added. The project will require $7000 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 12 percent and a tax rate of 35 percent? $19,812.09 $20,360.22 $15,429.48 $13,199.40 $24,738.41
Kaleo has made up his mind—he wants a pool in the family’s backyard! He figures his kids and spouse will be thrilled. However, to cover the cost of the pool, they’ll have to pack up and live away from home for a few weeks during the summer to rent their home to vacationers. He crunched the numbers based on the following estimates. 1. Cost of pool/installation $50,000 2. Life of the pool (no salvage value) 20 years 3. Annual net cash inflows from renting (net of cash expenses for renting and pool maintenance) $6,500 4. Tax rate 23% 5. Average rate of return 8% Kaleo’s daughter, Sarah, found the above information written on a sheet of paper in his office, along with the following notes. “This is a no-brainer! We’ll recover the cost of this pool in just 7 years, even though we plan to live here until we’re old and gray, or at least as long as the pool hangs on. If we can rent our house out for just 3 weeks each year, it’ll be almost pure profit that we can put toward paying off…
Sara has just been hired as a cost engineer by a large Pharmaceutical Company. Suppose she believes that the cash revenues from a new project will be $20,000 per year, assuming everything goes as expected. Cash costs (including taxes) will be $14,000 per year. She will wind down the project in eight years. The plant, property, and equipment will be worth $2,000 as salvage at that time. The project costs $30,000 to launch. She uses a 15 percent discount rate on new projects such as this one. Is this a good investment? If there are 1,000 shares of stock outstanding, what will be the effect on the price per share of taking this investment?
Cheryl Druehl needs to purchase a new milling machine. She is considering two different competing machines. Milling Machine A will cost $300,000 and will return $80,000 peryear for 6 years, with no sa lvage value. Milling machine B will cost $220,000 and will return $60,000 for 5 years, with a salvage value of $30,000. The firm is currently using 7% as the cost of capital. Using net present value as the criterion, which machine should be purchased?
The golf range is considering adding an additional driving range to its facility. The range would cost $229000 would be depreciated on a straight line basis over its seven year life, and would have a zero salvage value. The anticipated revenue from the project is $62500 a year with $18400 of that amount being variable cost. The fixed cost would be $15700. The firm believes that it will earn an additional $22500 a year from its current operations should the driving range be added. The project will require $3000 of net working capital, which is recoverable at the end of the project. What is the internal rate of return on this project at a tax rate of 21 percent?
Green Company can purchase a new machine for $100,000. The new machine will have a five-year life with no salvage value. The machine should reduce labor costs by $22,000 per year. Green Company would have to scrap its existing machine, receiving no cash. The existing machine has a book value of $15,000. Should Green purchase the new machine? Yes, as the decreased labor costs are greater than the cost of the new machine. No, as the decreased labor costs are less than the cost of the new machine plus the book value of the existing machine. No, as the decreased labor costs are less than the cost of the new machine. Yes, as the decreased labor costs are greater than the cost of the new machine plus the book value of the existing machine.
You are running a small machine shop where you need to replace a worn-out sanding machine. Two different models have been proposed:• Model A is semiautomated, requires an initial investment of $150,000, and has an annual operating cost of $55,000 for each of three years, at which time it will have to be replaced. The expected salvage value of the machine is just $15,000.• Model B is an automated machine with a five-year life and requires an initial investment of $230,000 with an estimated salvage value of $35,000. Expected annual operating and maintenance cost of the B machine is $30,000. Suppose that the current mode of operation is expected to continue for an indefinite period. You also think that these two models will be available in the future without significant changes in price and operating costs. At MARR = 15%, which model should you select? Apply the annual-equivalence approach to select the most economical machine.
A factory has the following alternative: buy a used machine at a price of $10,000.00 or a new machine at a price of $30,000.00. Annual labor costs are $20,000 for the used machine and $15,000 for the new machine. The annual energy costs are $8,000.00 and $10,000.00 respectively. In the case of the used machine, the salvage value after 5 years would be nil, while that of the new machine would be equal to $5,000.00. Considering an MARR of 20% per year what is the best alternative? Use the equivalent annual cost
Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $290,000 and have a tenericals controll nortunately, the new machine would have no salvage value. The new machine would cost $48,000 per year to operate and maintain but would save $89,000 per year in labor and other costs. The old machine can be sold now for scrap for $29,000. The simple rate of return on the new machine is closest to (Ignore income taxes.):
Super Apparel wants to replace an old machine with a new one. The new machine would increase annual revenue by $200,000 and annual operating expenses by $80,000. The new machine would cost $400, 000. The estimated useful life of the machine is 10 years with zero salvage value. i. Compute the Accounting Rate of Return (ARR) of the machine using the above information. ii. Should Super Apparel purchase the machine if management wants an Accounting Rate of Return (ARR) of 19% on all capital investments? Hint: Use Average Income or Profit after deducting tax, depreciation, and operating expenses.
Garrett Boone, Bridgeport Enterprises’ vice president of operations, needs to replace an automatic lathe on the production line. The model he is considering has a sales price of $233,282 and will last for 15 years. It will have no salvage value at the end of its useful life. Garrett estimates the new lathe will reduce raw materials scrap by $24,000 per year. He also believes the lathe will reduce energy costs by $6,000 per year. If he purchases the new lathe, he will be able to sell the old lathe for $5,100.Click here to view the factor table.(a) Calculate the lathe’s internal rate of return. (Round answer to 0 decimal places, e.g. 25%.) Internal rate of return enter the internal rate of return in percentages rounded to 0 decimal places %

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