Problem 21-10 Leasing and Salvage ValueThe Wildcat Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its oil exploration business. Management has decided that itmust use the system to stay competitive; it will provide $3.6 million in annual pretax costsavings. The system costs $8.6 million and will be depreciated straight-line to zeroover five years. Wildcat's tax rate is 21 percent and the firm can borrow at 7 percent.Lambert's policy is to require its lessees to make payments at the start of theyear. Suppose it is estimated that the equipment will have an aftertax residual value of$820,000 at the end of the lease. What is the maximum lease payment acceptable toWildcat? (Do not round intermediate calculations and enter your answer in dollars, notmillions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)Lease payment

Answered: Problem 21-10 Leasing and Salvage Value…

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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Problem 10-33 Calculating a Bid Price (L08) Komoka Enterprises needs someone to supply it with 155,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It will cost you $955,000 to install the equipment necessary to start production. The equipment will be depreciated at 30% ( Class 10), and you estimate that it can be salvaged for $100,000 at the end of the five-year contract. Your fixed production costs will be $450,000 per year, and your variable production costs should be $16.60 per carton. You also need an initial net working capital of $105.000. If your tax rate is 35% and you require a 12 % return on your Investment, what bid price should you submit? (Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) Bid price $ per carton D
Exercise 16-12A (Algo) Determining the payback period LO 16-4 Baird Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $13,020,000, it will enable the company to increase its annual cash inflow by $6.200,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $40,040,000, it will enable the company to increase annual cash flow by $9.100,000 per year. This plane has an eight-year useful life and a zero salvage value. Required o. Determine the payback period for each investment alternative and identify the alternative Baird should accept if the decision is based on the payback approach. (Round your answers to 1 decimal place.) Payback Period a-1. Alternative 1 (First plane) years Altenative 2 (Second plane) years a-2. Baird should accept
QUESTION 7 Massey Enterprises is planning to buy a new machine to decrease the overall cost of production. This machine will cost $50000 and will help to save the company $22000 in operating costs annually. The machine will be fully depreciated using a straight-line depreciation method to a useful life of 4 years. The actual market value of the machine is expected to be zero at the termination of the project. The marginal tax rate for the company is 21 and the discount rate for this project is 11 percent. What is the net present value of this 4-year project?
Problem 21-4 Taxes and Leasing Cash Flows You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $6,300,000 and would be depreciated straight-line to zero over six years. Because of radiation contamination, it will actually be completely valueless in six years. You can lease it for $1,260,000 per year for six years. Assume that your company does not contemplate paying taxes for the next several years. You can borrow at 6 percent before taxes. What is the NAL of the lease? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NAL
Problem 21-9 Lease or Buy The Wildcat Oil Company is trying to decide whether to lease or buy a new computer- assisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $1.5 million in annual pretax cost savings. The system costs $8.9 million and will be depreciated straight-line to zero over its five-year life, after which it will be worthless. Wildcat's tax rate is 22 percent and the firm can borrow at 7 percent. Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $1,990,000 per year. Lambert's policy is to require its lessees to make payments at the start of the year. a. What is the NAL for Wildcat? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) b. What is the maximum lease payment that would be acceptable to Wildcat? (Do not round intermediate…
Problem 6-26 Project Analysis and Inflation Shinoda Manufacturing, Incorporated, has been considering the purchase of a new manufacturing facility for $540,000. The facility is to be fully depreciated on a straight- line basis over seven years. It is expected to have no resale value at that time. Operating revenues from the facility are expected to be $410,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 2 percent. Production costs at the end of the first year will be $255,000, in nominal terms, and they are expected to increase at 3 percent per year. The real discount rate is 5 percent. The corporate tax rate is 25 percent. Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV
QUESTION 1 Frank Einstein Co. is a firm that specializes in selling Halloween decorations. It is evaluating a new project that requires an initial investment of $1.42 million. The asset will be depreciated to zero over its 3-year life. The company's analysts estimate that in the first year, the project will generate $1.09 million in revenues. The revenue will increase by 7% per year in the following two years. The costs in the first year will be $475,000 and they will increase by 5% per year thereafter. The corporate tax rate is 25% and the required return is 12%. What is the NPV of the project?
ces We are evaluating a project that costs $2,160,000, has a 8-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 90,900 units per year. Price per unit is $38.91, variable cost per unit is $24.00, and fixed costs are $863,000 per year. The tax rate is 21 percent and we require a return of 11 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. Best-case NPV Worst-case NPV
Problem 7-2 Scenario Analysis We are evaluating a project that costs $520,000, has a life of 6 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 73,000 units per year. Price per unit is $45, variable cost per unit is $30, and fixed costs are $840,000 per year. The tax rate is 21 percent, and we require a return of 15 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Best-case NPV Worst-case NPV
Problem 22-15 Management of Braden Boats, Inc. is considering an expansion in the firm's product line that requires the purchase of an additional $160,000 in equipment with installation costs of $15,000 and removal expenses of $4,500 (Note: the removal expenses are considered terminal cash flows and not associated with the installation of the new equipment). The equipment and installation costs will be depreciated over five years using straight-line depreciation. The expansion is expected to increase earnings before depreciation and taxes as follows: Years 1 and 2 $64,000 Years 3 and 4 $51,000 The firm's income tax rate is 30 percent and the weighted-average cost of capital is 6 percent. Based on the net present value method of capital budgeting, should management undertake this project? Use Appendix B to answer the question. Use a minus sign to enter a negative value, if any. Round your answer to the nearest dollar NPV: $ The firm -Select- Year 5 $50,000 make the investment.
Problem 7-2 Scenario Analysis We are evaluating a project that costs $1,080,000, has a life of 10 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 52,000 units per year. Price per unit is $50, variable cost per unit is $30, and fixed costs are $730,000 per year. The tax rate is 25 percent, and we require à return of 15 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Best-case NPV Worst-case NPV
Problem 12-43 Basic Internal Rate of Return Analysis Julianna Cardenas, owner of Baker Company, was approached by a local dealer of al conditioning units. The dealer proposed replacing Baker's old cooling system with a modern more efficient system. The cost of the new system was quoted at $339,000, but it would cave $60,000 per year in energy costs. The estimated life of the new system is 10 years, with no salvage value expected. Excited over the possibility of saving $60,000 per year and having a more reli- able unit, Julianna requested an analysis of the project's economic viability. All capital projects are required to earn at least the firm's cost of capital, which is 8%. There are no income taxes Required: 1. Calculate the project's IRR. Should the company acquire the new cooling system? 2. Suppose that energy savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firm's cost of capital. 3. Suppose…

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