The estimate for the Gross Pointe project is: • market research: $2 million • research & development: $5 million • initial investments: $25 million • Cost of salvage and removal: $1 million The project has not undertaken any of the above steps yet. What amount should be considered a SUNK cost?

The estimate for the Gross Pointe project is: • market research: $2 million • research & development: $5 million • initial investments: $25 million • Cost of salvage and removal: $1 million The project has not undertaken any of the above steps yet. What amount should be considered a SUNK cost?

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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Hearne Company has a number of potential capital investments. Because these projects vary in nature, initial investment, and time horizon, management is finding it difficult to compare them. Assume straight line depreciation method is used. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided.) Project 1: Retooling Manufacturing Facility This project would require an initial investment of $4,930,000. It would generate $937,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,880,000. Project 2: Purchase Patent for New Product The patent would cost $3,680,000, which would be fully amortized over five years. Production of this product would generate $607,200 additional annual net income for Hearne. Project 3: Purchase a New Fleet of Delivery Trucks Hearne could purchase 25 new delivery trucks at a cost of $145,400 each. The…
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PC Shopping Network may upgrade its modem pool. It last upgraded 1 year ago, when it spent $114 million on equipment with an assumed life of 4 years and an assumed salvage value of $22 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $86 million. A new modem pool can be installed today for $156 million. This will have a 3-year life, and will be depreciated to zero using straight-line depreciation. The new equipment will enable the firm to increase sales by $15 million per year and decrease operating costs by $12 million per year. At the end of 3 years, the new equipment will be worthless. Assume the firm's tax rate is 35% and the discount rate for projects of this sort is 13%. (Enter your answers in millions. For example, an answer of $13,000,000 should be entered as 13. Use minus sign to enter cash outflows, if any.) a. What is the net cash flow at time 0 if the old equipment is replaced? (Do not round intermediate…
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Consider a four-year project with the following information: Initial fixed asset investment = $560,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $28; variable costs = $20; fixed costs = $200,000; quantity sold = 86,000 units; tax rate = 35 percent. How sensitive is OCF to changes in quantity sold? (Do not round intermediate calculations and round your answer to 2 decimal places,

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