Question 1 Booth Company wants to buy a numerically controlled (NC) machine to be used in producing specially machined parts for manufacturers of tractors. The outlay required is $960,000. The NC equipment will last 5 years with no expected salvage value. The expected after-tax cash flows associated with the project follow: Year Cash Revenues Cash Expenses 1 $1,275,000 $900,000 2 1,475,000 1,015,000 3 1,650,000 1,200,000 4 1,358,000 1,118,000 5 1,550,000 1,225,000 Required: A. Compute the payback period for the NC equipment. B. Compute the NC equipment's ARR. C. Compute the investment's NPV, assuming a required rate of return of 10%. D. Compute the investment's IRR.

Question 1 Booth Company wants to buy a numerically controlled (NC) machine to be used in producing specially machined parts for manufacturers of tractors. The outlay required is $960,000. The NC equipment will last 5 years with no expected salvage value. The expected after-tax cash flows associated with the project follow: Year Cash Revenues Cash Expenses 1 $1,275,000 $900,000 2 1,475,000 1,015,000 3 1,650,000 1,200,000 4 1,358,000 1,118,000 5 1,550,000 1,225,000 Required: A. Compute the payback period for the NC equipment. B. Compute the NC equipment's ARR. C. Compute the investment's NPV, assuming a required rate of return of 10%. D. Compute the investment's IRR.

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

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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?
Required information A company that manufactures magnetic flow meters expects to undertake a project that will have the cash flows estimated. First cost, $ Equipment replacement cost in year 2, $ Annual operating cost, $/year Salvage value, $ Life, years -880,000 -300,000 -930,000 250,000 14 At an interest rate of 10% per year, what is the equivalent annual cost of the project? Find the AW value using tabulated factors The equivalent annual cost of the project is $- 980,731.95
QUESTION 3 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $55. The production cost of each heater is $35. You are expecting to sell 9000 units per year. This project has an economic life of 6 years. The project requires an investment of $700000 in plants and equipment. This equipment will be depreciated to zero salvage value based on 5-year MACRS schedule. The depreciation rates from year 1 to 6 are 20 % ,32 %, 19.2 %, 11.52 %, 11.52 %, and 5.76 percent, respectively. The company will sell its old equipment for $100,000. The old machine is fully depreciated. The required rate of return for the project is 12 percent, the working capital requirement is 10 percent of the next year's sales revenue. The marginal corporate tax rate is 20 percent. At the termination of the project, the plant and equipment will be sold for an estimated value of $50000. Based on these assumptions, estimate the cash flow for capital expenditures.…
3. Becktell Industries has an offer to build a special product for the state highway patrol. The contract will cover a period of 10 years. The projected cash flows associated with the contract are given below: Required: Complete an analysis to calculate the net present value of the above cash flows. Company Required Rate of Return 11% Cost of new equipment 325,000 Working Capital needed 150,000 Net annual cash receipts 80,000 Salvage Value at end 75,000
A company is considering buying a new machine. Specific details: Initial Investment $400,000 Annual Cash Revenues $375,000 Annual Cash Expense $262,000 Expected Life 5 Years Salvage Value $0 Discount Rate 10% All cash flows are after tax. 1 Prepare a schedule that shows the applicable cash flows and other relevant items for this decision 2 Compute the payback period for the new machine 3 Compute the Accounting Rate of Return (ARR) for the new machine
Problem 1 The Bird Co. is considering a 7-year project that would require a cash outlay of $160,000 for machinery and an additional $25,000 for working capital that would be released at the end of the project. The equipment would be depreciated evenly over the 7 years and have a salvage value of $10,000 at the end of 7 years. The project would generate before tax annual cash inflows of $50,000. The tax rate is 21% and the company's discount rate is 14%. What is the annual accounting income? What is the annual after-tax cash flow? What is the payback based upon the initial cash outflows? What is the discounted payback based upon the initial cash outflows?

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