Sheridan Solutions, Inc., has just invested $5,288,700 in new equipment. The firm uses a payback period criterion of rejecting anyproject that takes more than four years to recover its costs. Management anticipates cash flows of $494 300, $750,400, $1,087,300$1,327.500, $2,098.300, and $2/52,000 over the next six years. (Round answer to 2 decimal places, e.g. 15.25)What is the payback period of this investment?Payback period siyears.Should Sheridan Solutions, Inc. go ahead with this project?The firmthe project.SUPPORT

To determine the payback period for Sheridan Solutions, Inc.'s investment, we calculated the…

Answered: Sheridan Solutions, Inc., has just…

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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1. Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.82 million. The marketing department predicts that sales related to the project will be $2.52 million per year for the next four years, after which the firm expects to sell it for $500,000. The machine is a five-year class asset and will be depreciated down to zero over five years under the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales. Howell also needs to add net working capital of $200,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 35 percent. The required rate of return (or discount rate) for the project is 12.5 percent. Compute the NPV, IRR, and payback period of the project. The firm’s acceptable payback period is 3 years. Is this project acceptable to the firm?
A corporation is evaluating the relevant cash flows for a capital budgeting decision and must estimate the terminal cash flow. The proposed machine will be disposed of at the end of its usable life of five years at an estimated sale price of $20937. The machine has an original purchase price of $16086, installation cost of $1795, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $4322. The firm has a 40 percent tax rate on ordinary income and long-term capital gain. The terminal cash flow is:
National Integrated Systems (NIS), a global provider of heating and air conditioning is planning a project whose data is provided below. The project’s equipment has a 3 year tax life after which its salvage value will be zero. The machinery will be depreciated on a straight line basis over three years. Revenues and other operating costs are expected to be constant over the project’s life. What is the project’s cash flow in Year 1? Equipment Cost = $130,000Depreciation rate = 33.33%Annual Sales Revenue= $120,000Operating Costs (ex Depreciation) = $50,000 Tax Rate = 35%
We are evaluating a project that costs $953,000, has a life of ten years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 134,000 units per year. Price per unit is $37, variable cost per unit is $23, and fixed costs are $957,765 per year. The tax rate is 24 percent, and we require a return of 17 percent on this project. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 14 percent. Calculate the best case npv and worst case npv
Tidal Wave is considering purchasing a water park in Fort Worth, Texas, for $2,100,000. The new facility will generate annual net cash inflows of $495,000 for ten years. Engineers estimate that the facility will remain useful for ten years and have no residual value. The company uses straight-line depreciation. Its owners want payback in less than five years and an ARR of 12% or more. Management uses a 10% hurdle rate on investments of this nature. (Click the icon to view the present value annuity table.) (Click the icon to view the future value annuity table.) Read the requirements. (Click the icon to view the present value table.) (Click the icon to view the future value table.) Requirement 1. Compute the payback period, the ARR, the NPV, and the approximate IRR of this investment. (If you use the tables to compute the IRR, answer with the closest interest rate shown in the tables.) (Round the payback period to one decimal place.) The payback period (in years) is (Round the…
Roberts Company is considering an investment in equipment that is capable of producing moreefficiently than the current technology. The outlay required is $2,293,200. The equipment isexpected to last five years and will have no salvage value. The expected cash flows associatedwith the project are as follows: Year Cash Revenues Cash Expenses 1 $2,981,160 $2,293,200 2 2,981,160 2,293,200 3 2,981,160 2,293,200 4 2,981,160 2,293,200 5 2,981,160 2,293,200 Required:1. Compute the project’s payback period.2. Compute the project’s accounting rate of return.3. Compute the project’s net present value, assuming a required rate of return of 10 percent.4. Compute the project’s internal rate of return.
We are evaluating a project that costs $976,000, has a life of ten years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 144,000 units per year. Price per unit is $36, variable cost per unit is $25, and fixed costs are $984,784 per year. The tax rate is 23 percent, and we require a return of 13 percent on this project. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 17 percent. a. Calculate the best-case NPV. Best case b. Calculate the worst-case NPV. Worst case
Management of TSC, Inc. is evaluating a new $79,000 investment with the following estimated cash flows: Year Cash Flow 1 $ 13,000 2 29,000 3 47,000 4 61,000 The firm’s cost of capital is 14 percent and the project will require that the firm spend $25,000 to terminate the 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. The NPV of the investment is $ . Should the firm make the investment? The firm make the investment.
! Required information [The following information applies to the questions displayed below.] Project Y requires a $331,500 investment for new machinery with a five-year life and no salvage value. The project yields the following annual results. Cash flows occur evenly within each year. (PV of $1, EV of $1, PVA of $1, and FVA of $1) Note: Use appropriate factor(s) from the tables provided. Annual Amounts Sales of new product Expenses Materials, labor, and overhead (except depreciation) Depreciation-Machinery Selling, general, and administrative expenses Income Project Y $ 400,000 179,200 66,300 29,000 $ 125,500 3. Compute Project Y's accounting rate of return. Project Y Accounting Rate of Return Denominator: Numerator: / Accounting Rate of Return 0
The Amani Company is planning a $200,000 equipment investment that has an estimated eight-year life with no estimated salvage value. The company has projected the following annual cash flows for the investment. Year Cash Inflows $120,000 $70,000 $60,000 $60,000 $60,000 Total $370,000 1 4. Assuming that the cash inflows occur evenly over the year, what is the payback period for the investment? (Ignore income taxes in this problem.)
Pharoah Manufacturing Co. is evaluating two projects. The company uses payback criteria of three years or less. Project A has a cost of $901,000, and project B's cost is $1,268,100. Cash flows from both projects are given in the following table. Year Project A $86,212 1 2 3 4 313,562 427,594 285,552 Project B $586,212 413,277 231,199 What are their discounted payback periods? (Round answers to 2 decimal places, e.g. 15.25. If discounted payback period exceeds life of the project, enter 0.00 for the answer.) Discounted payback period of project A Pharoah should choose Discounted payback period of project B Which will be accepted with a discount rate of 8 percent?
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