ow to find ARR
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Basic Capital Budgeting Techniques; No Taxes, Uniform Net Cash Inflows; Spreadsheets
Bob Jensen Inc. purchased a $650,000 machine to manufacture specialty taps for electrical equipment.
Jensen expects to sell all it can manufacture in the next 10 years. To encourage capital investments,
the government has exempted taxes on profits from new investments. This legislation is to
be in effect for the foreseeable future. The machine is expected to have a 10-year useful life with no
salvage value. Jensen uses straight-line
each year for 10 years. Jensen uses a 12% discount rate in evaluating capital investments. Assume,
for simplicity, that MACRS depreciation rules do not apply.
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- Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects: Year Sales (Revenues) Cost of Goods Sold (50% of Sales) Depreciation = EBIT 0 A. $66,600 B. $55,500 C. $59,200 D. $74,000 Taxes (20%) = unlevered net income + Depreciation + changes to working capital - capital expenditures The free cash flow for the last year of Epiphany's project is closest to: 1 150,000 75,000 20,000 55,000 11,000 44,000 20,000 - 5,000 - 90,000 2 150,000 75,000 20,000 55,000 11,000 44,000 20,000 - 5,000 3 150,000 75,000 20,000 55,000 11,000 44,000 20,000 10,000The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year 1 2 $18,750 18,750 18,750 18,750 18,750 The average rate of return for this investment 3 4 Operating Income 5 Net Cash Flow $93,750 93,750 93,750 93,750 93,750(Ignore income taxes in this problem.) Your Company is considering a project with a 6-year life. Your required rate of return is 14%. What is the net present value of the project? Project Cost of equipment needed now $50,000 Working capital investment needed now 65,000 Annual cash operating inflows 25,000 Salvage value of equipment in 6 years $11,865 O ($7,755. O $47,225 $13,350.
- An investor wants to do capital budgeting for his new investment project. He has the following information: IRS will allow the investor to depreciate the investment using straight-line over 10 years. The marginal tax rate will be 20% over the next 5 years & it will be 10% from the 6th to the 10th year. The investor expects that the terminal value for the investment is $40,000 at the end of 6 years.(a 6-year project) What is the after- tax terminal value of this investment if the initial cost is $60,000? $39,200 O $36,800 O $37,600 $38,400 O None of the AnswersR-Kraine Inc. is considering acquiring an existing project (with financial backing from the government). The project is expected to have another 8 (full) years of economic life. The project's year-end cash flows are as follows: Years 1-4: $2m each year Years 5-8: $500,000, $2m, $500,000 and $2m (respectively) Suppose the relevant discount rate for the project could be estimated from the following cash flows of an 8-year (fixed) coupon bond issued by R-Kraine a couple of months ago: Current market price (per unit): $584,608.5676 Face value (per unit): $800,000 Yearly coupon payments: $72,000 Calculate the YTM of the bond. [Hint: State clearly the relevant numerical formula and then crunch out the answer using Excel program or financial calculator. The answer can also be solved with a scientific calculator using a manual trial-and-error approach as the YTM was set to be an integer.] a)Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 8%. 0 1 2 3 4 Project A -1,200 700 375 290 340 Project B -1,200 300 310 440 790 What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places. years What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places. years What is Project B's payback? Do not round intermediate calculations. Round your answer to four decimal places. years What is Project B's…
- Accounting The SWEET Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $200,000. The equipment will have an initial cost of $900,000 and have a 6-year life. The salvage value is $60,000 at the end of the sixth year. If the hurdle rate is 12%, the internal rate of return is ____ %. (express your final answer in basis points, i.e., 13.14%)Mobilio Company has hired a consultant to propose a way to increase the company’s revenues. The consultant has evaluated two mutually exclusive projects with the following information provided for each project: Project Tiger Project SharkCapital investment $1,105,000 $625,000Annual cash flows 180,000 105,000Estimated useful life 10 years 10 years Mobilio Company uses a discount rate of 9% to evaluate both projects.Instructions(a) Calculate the net present value of both projects.(b) Calculate the profitability index for each project.(c) Which project should Mobilio accept?The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Biofuel Equipment $300,000 300,000 3 300,000 4 300,000 The wind turbines require an investment of $887,600, while the biofuel equipment requires an investment of $911,100. No residual value is expected from either project. Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 Year 1 2 1 2 3 4 5 6 7 8 9 10 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360 Wind Turbines $280,000 280,000 280,000 280,000 5.335 5.759 6.145 0.893 1.690 2.402 3.037 3.605 4.111 4.564 4.968 5.328 5.650 0.870 1.626 2.283 2.855 3.353 3.785 4.160 4.487 4.772 5.019 20% 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192
- Staple Company is considering two capital investment proposals. Estimates regarding each project are provided below: Project Beans Project Rice Initial investment Annual net income Net annual cash flow Estimated useful life Salvage value Periods 5 6 9% The company requires a 10% rate of return on all new investments. Present Value of an Annuity of 1 11% 12% 3.890 4.486 10% 3.791 $400,000 4.355 20,000 100,000 5 years -0- 3.696 4.231 $600,000 42,000 142,000 6 years -0- The net present value for Project Rice is 3.605 4.111Problem 1 The Bird Co. is considering a 7-year project that would require a cash outlay of $160,000 for machinery and an additional $25,000 for working capital that would be released at the end of the project. The equipment would be depreciated evenly over the 7 years and have a salvage value of $10,000 at the end of 7 years. The project would generate before tax annual cash inflows of $50,000. The tax rate is 21% and the company's discount rate is 14%. What is the annual accounting income? What is the annual after-tax cash flow? What is the payback based upon the initial cash outflows? What is the discounted payback based upon the initial cash outflows?