Suppose that ACF shoes expects to sell 49,000 pairs of shoes for the next 3 years at $124 a pair. It costs $76 a pair toproduce. The initial investment in equipment is $840,000, and it will depreciate straight-line to zero over three years. Fromyear 4 onwards, 27,000 pairs of the shoes are expected to be sold at $105 a pair. The increased variable costs will be $86a pair but no extra investment in equipment will be needed. This production can be carried out indefinitely.Find the free cash flows and find the value of the business when the cost of capital is 12.4% and the tax rate is 21%.[Hint: set up year O to year 3 as in chapter 6 to find the FCF (or the total asset cash flow) and find the FCF for year 4 butremember that there is no depreciation.]Show work in ExcelYearOCFCF from Capital InvestmentCF from change in WCFCF0 1 2 3 4

In the NPV analysis, we compute the present value of all future benefits. This present value is then…

Answered: Suppose that ACF shoes expects to sell…

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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MicroCam produces a single product. Variable cost per unit is $25, and fixed costs are $95,000 per year. If the firm sells 5,000 units per year, what price should be charged for each unit to earn $35,000?
Chocoholics Anonymous wants to modernize its production machinery. The company's sales are $9.22 million per year, and the choice of machine won't impact that amount. The required return is 10 percent and the tax rate is 35 percent. Both machines will be depreciated on a straight-line basis. Machine Amaretto costs $1,950,000 and will last for 5 years. Variable costs are 39 percent of sales, and fixed costs are $131,000 per year. Machine Baileys costs $4,610,000 and will last for 7 years. Variable costs for this machine are 31 percent of sales and fixed costs are $103,000 per year. Required: (a)If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine Amaretto? (Do not round your intermediate calculations.) HINT: In EAC problems you first need to find the NPV. Using this NPV you can then calculate the annuity (annual cost) that has the same present value/cost. The lecture videos include a detailed example of this calculation.…
Hit or Miss Sports is introducing a new product this year. If its see-at-night soccer balls are a hit, the firm expects to be able to sell 42,800 units a year at a price of $70 each. If the new product is a bust, only 20,700 units can be sold at a price of $45. The variable cost of each ball is $26 and fixed costs are zero. The cost of the manufacturing equipment is $5.86 million, and the project life is estimated at 10 years. The firm will use straight-line depreciation over the 10-year life of the project. The firm's tax rate is 35% and the discount rate is 14%. a. If each outcome is equally likely, what is the expected NPV? ( Use the minus sign for negative value. Round your answer to the nearest dollar.) NPV $ Will the firm accept the project? The firm will (Click to select) v the project. b. Suppose now that the firm can abandon the project and sell off the manufacturing equipment for $5.2 million if demand for the balls turns out to be weak. The firm will make the decision to…
Hit or Miss Sports is introducing a new product this year. If its see-at-night soccer balls are a hit, the firm expects to be able to sell 42,700 units a year at a price of $64 each. If the new product is a bust, only 22,200 units can be sold at a price of $41. The variable cost of each ball is $27 and fixed costs are zero. The cost of the manufacturing equipment is $5.92 million, and the project life is estimated at 9 years. The firm will use straight-line depreciation over the 9-year life of the project. The firm's tax rate is 35% and the discount rate is 13%. Now suppose that Hit or Miss Sports can expand production if the project is successful. By paying its workers overtime, it can increase production by 20,100 units; the variable cost of each ball will be higher, equal to $32 per unit. By how much does this option to expand production increase the NPV of the project? Assume that the firm decides whether to expand production after it learns the first-year sales results. (Round…
Shue Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $24,700, and the company expects to sell 1,640 per year. The company currently sells 1,990 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,660 units per year. The old board retails for $23,100. Variable costs are 53 percent of sales, depreciation on the equipment to produce the new board will be $1,035,000 per year, and fixed costs are $3,250,000 per year. If the tax rate is 24 percent, what is the annual OCF for the project? Note: Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32. OCF
Mueller Corp. manufactures flash drives that sell for $5.00. Fixed costs are $28,000 and variable costs are $3.60 per unit. Mueller can buy a newer production machine that will increase fixed costs by $8,000 per year, and will decrease variable costs by $0.40 per unit. What effect would the purchase of the new machine have on Mueller's break-even point in units?
Shue Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $24,100, and the company expects to sell 1,580 per year. The company currently sells 1,930 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,600 units per year. The old board retails for $22,500. Variable costs are 53 percent of sales, depreciation on the equipment to produce the new board will be $1,395,000 per year, and fixed costs are $3,100,000 per year. If the tax rate is 23 percent, what is the annual OCF for the project? Note: Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32. OCF
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