Plant Company is contemplating the purchase of a new plece of equipment for $40,000. Plant is in the 40%Income tax bracket. Predicted annual after-tax cash inflows from this Investment are $17,000, $13,000, $8,000,$4,000 and $6,000 for years 1 through 5, respectively. The firm uses straight-line depreciation with no residualvalue at the end of five years.Assume that the hurdle rate for accepting new capital investment projects for the company is 4%, after-tax(Note: PV $1 factors for 4% are as follows: for year 1-0.962, for year 2=0.925, for year 3-0.889. for year 4 -0.855, for year 5-0.822; the PV annulty factor for 4%, 5 years-4.452) At an after-tax discount rate of 4%, theestimated net present value (NPV) of the proposed investment is (rounded to the nearest hundred dollars)Multiple ChoiceO($13,000)($10,300)($7,300)($4,000)$3,800

The NPV of the project is the initial investment subtracted from the present value of all the future…

Answered: Plant Company is contemplating the…

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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What is the NPV assuming a 12% rate of return. (ignore Tax) Bramble Inc. is considering modernizing its production facility by investing in new equipment and selling the old equipment. The following information has been collected on this investment: Depreciation is $10, 230 per year for the old equipment. The straight-line depreciation method would be used for the new equipment over an eight-year period with salvage value of $4,600. Calculate NPV assuming a 12% rate of return Bramble Inc. is considering modernizing its production facility by investing in new equipment and selling the old equipment. The following information has been collected on this investment: Cost Old Equipment Accumulated depreciation Remaining life Current salvage value Salvage value in 8 years Annual cash operating costs $81,840 Cost $41,000 8 years $11,200 $0 $35,700 New Equipment Estimated useful life Salvage value in 8 years Annual cash operating costs $38,000 8 years $4,600 $30,700 Depreciation is $10,230 per…
Suppose a business is considering the purchase of a $40,000 machine whose operation will result in increased sales of $30,000 per year and increased operating costs of $10,000; additional profits will be taxed at a rate of 50%. Depreciation is assumed to be taken on a straight-line basis over four years with no expected salvage value. What will happen to this project's real rate of return if inflation during the next four years is expected to be 10% compounded annually?
Tanner Corporation is considering the acquisition of a new machine that is expected to produce annual savings in cash operating costs of $70,000 before income taxes. The machine costs $244,000, has a useful life of five years, and no salvage value. Tanner uses straight-line depreciation on all assets, is subject to a 30% income tax rate, and has an after-tax hurdle rate of 8 %. FV of $1 at FV of an ordinary annuity at PV of $1 at PV of an ordinary annuity at Yr .8% 8% 8% 8% 1 1.080 1.000 0.926 0.926 2 1.166 2.080 0.857 1.783 3 1.260 3.246 0.794 2.577 4 1.360 4.506 0.735 3.312 5 1.469 5.867 0.681 3.993 6 1.587 7.336 0.630 4.623 Required: If the machine's accounting rate of return on the initial investment is 6%. Compute the machine's net present value
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XYZ Co is considering to purchase equipment that has 6 years of life and requires an initial capital outlay of $60 million. The equipment will be depreciated using straight line method to zero book value in 6 years. The salvage value of the equipment is expected to be $10 million in six years. The equipment is expected to increase revenue by $25 million and increase expenses by $8 million each year over the next six years. XYZ has an income tax rate of 20%, and a cost of capital of 12%. 5 1. Determine the initial cash flow of the investment at time 0, operating cash flow each year for the next 5 years, and the terminal cash flow of the investment in year 6. 2. Determine the net present value and internal rate of return of the investment. Should the investment be taken? 3. Copy and past your work done for this problem above to the right. Use Excel Goal Seek to find the cost of capital that results in a net present value of $5 million. (You should have the results of both 2. and 3. shown…
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