Problem 1: American Company is considering a new product whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero-salvage value, and no change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other American products and would reduce their pre-tax annual cash flows. What is the project's NPV? IRR? Briefly discuss the results. WACC 10.0% Pre-tax cash flow reduction for other products (cannibalization) Investment cost (depreciable basis) -$5,000 $80,000 Annual sales revenues Annual operating costs (excl. depreciation) Tax rate $67,500 -$25,000 35.0%

Problem 1: American Company is considering a new product whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero-salvage value, and no change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other American products and would reduce their pre-tax annual cash flows. What is the project's NPV? IRR? Briefly discuss the results. WACC 10.0% Pre-tax cash flow reduction for other products (cannibalization) Investment cost (depreciable basis) -$5,000 $80,000 Annual sales revenues Annual operating costs (excl. depreciation) Tax rate $67,500 -$25,000 35.0%

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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At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best financial decision for the company. Jones Co. is considering replacing an existing piece of equipment. The project involves the following: • The new equipment will have a cost of $9,000,000, and it is eligible for 100% bonus depreciation so it will be fully depreciated at t = 0. • The old machine was purchased before the new tax law, so it is being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left ($50,000 per year). • The new equipment will have a salvage value of $0 at the end of the project's life (year 6). The old machine has a current salvage value (at year 0) of $300,000. • Replacing the old machine will require an investment in net operating working capital (NOWC) of $60,000 that will…
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Walton Manufacturing Company has an opportunity to purchase some technologically advanced equipment that will reduce the company's cash outflow for operating expenses by $1,287,000 per year. The cost of the equipment is $5,187,854.53. Walton expects it to have a 9-year useful life and a zero salvage value. The company has established an investment opportunity hurdle rate of 19 percent and uses the straight-line method for depreciation. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. W Required a. Calculate the internal rate of return of the investment opportunity. Note: Do not round intermediate calculations. b. Indicate whether the investment opportunity should be accepted. a. Internal rate of return b. Should the investment opportunity be accepted? Prev 1 of 15 「買買買 --- MacBook Air Next >
10) (Break-even analysis) The Marvel Mfg. Company is considering whether or not to construct a new robotic production facility. The cost of this new facility is $612,000 and it is expected to have a six-year life with annual depreciation expense of $102,000 and no salvage value. Annual sales from the new facility are expected to be 2,010 units with a price of $1,060 per unit. Variable production costs are $630 per unit, and fixed cash expenses are $76,000 per year. a. Find the accounting and the cash break-even units of production. b. Will the plant make a profit based on its current expected level of operations? c. Will the plant contribute cash flow to the firm at the expected level of operations? Question content area bottom Part 1 a. The accounting break-even units of production is______units.
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! Required information [The following information applies to the questions displayed below.] Beacon Company is considering automating its production facility. The initial investment in automation would be $7.40 million, and the equipment has a useful life of 6 years with a residual value of $1,040,000. The company will use straight- line depreciation. Beacon could expect a production increase of 36,000 units per year and a reduction of 20 percent in the labor cost per unit. Production and sales volume Sales revenue Variable costs Direct materials Direct labor Variable manufacturing overhead Total variable manufacturing costs Contribution margin Fixed manufacturing costs Net operating income Current (no automation) 77,000 units Net present value Per Unit $93 $16 25 10 51 $42 Total $ ? ? $ 1,240,000 ? Proposed (automation) 113,000 units Per Unit $93 $16 ? 10 ? $ 47 Total $ ? ? $ 2,330,000 ? 4. Using a discount rate of 14 percent, calculate the net present value (NPV) of the proposed…

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