Pique Corporation wants to purchase a new machine for $300,000. Management predicts that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (including depreciation) totaling $164,000 per year for net operating income of $36,000. The firm uses straight-line depreciation with no residual value for all depreciable assets. Management requires a minimum after-tax rate of return of 10% on all investments. What is the net present value (NPV) of the investment? # of years 1 234567 000 8 9 10 at 10% PV of $1 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 O-$363.936 O $63,936 O$163,524 O $136,476 at 10% PV of an annuity 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145

Pique Corporation wants to purchase a new machine for $300,000. Management predicts that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (including depreciation) totaling $164,000 per year for net operating income of $36,000. The firm uses straight-line depreciation with no residual value for all depreciable assets. Management requires a minimum after-tax rate of return of 10% on all investments. What is the net present value (NPV) of the investment? # of years 1 234567 000 8 9 10 at 10% PV of $1 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 O-$363.936 O $63,936 O$163,524 O $136,476 at 10% PV of an annuity 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 14P

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The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given here. The company’s cost of capital is 10%. Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life? Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
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Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.83 million. The marketing department predicts that sales related to the project will be $2.53 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down 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 30 percent of sales. The company also needs to add net working capital of $180,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 23 percent. The required rate of return is 13 percent. What is 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.,
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Build Corporation wants to purchase a new machine for $295,000. Management predicts that the machine can produce sales of $187,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $69,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Build's combined income tax rate is 20%. Management requires a minimum after-tax rate of return of 13% on all investments. What is the net after-tax cash inflow in Year 1 from the investment?
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