Problem 6-6 NPV and Bonus DepreciationEsfandairi Enterprises is considering a new 3-year expansion project that requires aninitial fixed asset investment of $2.29 million. The fixed asset qualifies for 100 percentbonus depreciation. The project is estimated to generate $1,790,000 in annual sales,with costs of $684,000. The project requires an initial investment in net working capitalof $410,000, and the fixed asset will have a market value of $420,000 at the end of theproject.a. If the tax rate is 21 percent, what is the project's Year O net cash flow? Year 1? Year 2?Year 3? (A negative answer should be indicated by a minus sign. Do not roundintermediate calculations and enter your answers in dollars, not millions of dollars,e.g., 1,234,567.)b. If the required return is 12 percent, what is the project's NPV? (Do not roundintermediate calculations and enter your answer in dollars, not millions of dollars,rounded to two decimal places, e.g., 1,234,567.89.)a. Year 0 cash flowa. Year 1 cash flowa. Year 2 cash flowa. Year 3 cash flowb. NPV$$873,7401,615,540

NPV is also known as Net present Value. It is a capital budgeting tehcnique which helps in decision…

Answered: Problem 6-6 NPV and Bonus Depreciation…

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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20- Project Beta is a 4-year project which requires an initial outlay of $6,000. This outlay will be depreciated using straight-line depreciation over the life of the project. It will generate incremental revenue of $6000 per year and incremental costs (excluding depreciation) of $1400. The tax rate is 35%. What is the project's annual incremental EBIT? a. $3100 b. $4600 c. $1600 d. $6100 Clear my choice
Problem 6-4 Calculating Project Cash Flow from Assets Esfandairi Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.29 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life. The project is estimated to generate $1,790,000 in annual sales, with costs of $700,000. The project requires an initial investment in net working capital of $410,000, and the fixed asset will have a market value of $420,000 at the end of the project. a. If the tax rate is 21 percent, what is the project's Year O net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.) b. If the required return is 12 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places,…
Consider the following information relating to the expected cash flows from two independent projects. The cash flows are expressed in real terms, the nominal discount rate is 10% p.a. and the expected inflation rate is 4% p.a. Time 0 1 2 3 4 5 6 Project 1 -$200,000 $50,000 $50,000 $50,000 $50,000 $50,000 Project 2 -$250,000 $65,000 $65,000 $65,000 $65,000 $65,000 $65,000 a) Calculate the NPV of each of the projects b) In no more than 6 lines, explain which of the above projects you should select and why?
Problem 6-10 Calculating Salvage Value An asset used in a 4-year project falls in the 5-year MACRS class for tax purposes. The asset has an acquisition cost of $8,900,000 and will be sold for $2,440,000 at the end of the project. If the tax rate is 23 percent, what is the aftertax salvage value of the asset? (MACRS schedule) (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Aftertax salvage value $ 2,232,149
None
QUESTION 30 Twin Buttes Mine Co. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $6,000 and $8,500 at the end of Years 1 and 2, respectively. In addition, Project X can be repeated at the end of Year 2 with no changes in its cash flows. Project Y has an expected life of 4 years with after-tax cash inflows of $4,600 at the end of each of the next 4 years. Each project has a WACC of 11%. What is the equivalent annual annuity of the most profitable project? a. $1,345.50 O b. $1,346.30 O c. $1,361.52 O d. $1,376.74 O e. $1,411.15
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
Brief Exercise 12-9 Swift Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $123,465 and will increase annual expenses by $67,000 including depreciation. The oil well will cost $481,000 and will have a $10,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return. (Round answer to 0 decimal places, e.g. 13%.) Annual rate of return % Click if you would like to Show Work for this question: Open Show Work
10 1 points Fun With Finance is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.484 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $193,200. The project requires an initial investment in net working capital of $276,000. The project is estimated to generate $2,208,000 in annual sales, with costs of $883,200. The tax rate is 33 percent and the required return on the project is 11 percent. Required: (a)What is the project's year 0 net cash flow? -2,760,000 V (b)What is the project's year 1 net cash flow? 1,044,770 (c) What is the project's year 2 net cash flow? 1,276,942 (d)What is the project's year 3 net cash flow? 1,566,300 (e)What is the NPV? 1,100,871 View previc
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 9-11 Calculating Project Cash Flow from Assets [LO 2] Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,480,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $3,470,000 in annual sales, with costs of $2,450,000. The project requires an initial investment in net working capital of $158,000, and the fixed asset will have a market value of $193,000 at the end of the project. Assume that the tax rate is 25 percent and the required return on the project is 9 percent. What are the net cash flows of the project each year? Note: A negative answer
Problem 7-18 Abandonment We are examining a new project. We expect to sell 6,100 units per year at $75 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $75 x 6,100 $457,500. The relevant discount rate is 18 percent, and the initial investment required is $1,720,000. After the first year, the project can be dismantled and sold for $1,550,000. Suppose you think it is likely that expected sales will be revised upward to 9,100 units if the first year is a success and revised downward to 4,700 units if the first year is not a success. a. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the value of the option to abandon? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. NPV b. Option value S $…

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