The Fleming Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 21 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Year 0 Year 1 Year 2 Year 3 Year 4 Investment $ 35,000 Sales revenue $ 18,000 $ 18,500 $ 19,000 $ 16,000 Operating costs 3,800 3,900 4,000 3,200 Depreciation 8,750 8,750 8,750 8,750 Net working capital spending 410 460 510 410? a. Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.) b. Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.) c. Suppose the appropriate discount rate is 11 percent. What is the NPV of the

The Fleming Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 21 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Year 0 Year 1 Year 2 Year 3 Year 4 Investment $ 35,000 Sales revenue $ 18,000 $ 18,500 $ 19,000 $ 16,000 Operating costs 3,800 3,900 4,000 3,200 Depreciation 8,750 8,750 8,750 8,750 Net working capital spending 410 460 510 410? a. Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.) b. Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.) c. Suppose the appropriate discount rate is 11 percent. What is the NPV of the

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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Romanos Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $5,000,000 for the year. Laura Berenstein, staff analyst at Romanos, is preparing an analysis of the three projects under consideration by Chester Romanos, the company's owner. Data Table A B C D 1 Project A Project B Project C 2 Projected cash outflow 3 Net initial investment $3,000,000 $2,100,000 $3,000,000 4 Projected cash inflows 5 Year 1 $1,200,000 $1,200,000 $1,700,000 6 Year 2 1,200,000 600,000 1,700,000 7 Year 3 1,200,000 500,000 200,000 8 Year 4 1,200,000 100,000 9 Required rate of return 10% 10% 10% 1. Because the company's cash is limited, Romanos thinks the payback method should be used to choose between the capital budgeting projects. a. What are the…
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A company is considering a $166,000 investment in machinery with the following net cash flows. The company requires a 10% return on its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Year 1 Year 2 Year 3 Year 4 Year 5 Net Cash Flow $10,000 $28,000 $55,000 $42,000 $111,000 (a) Compute the net present value of this investment.(b) Should the machinery be purchased?
Sa. A large profitable corporation is considering a capital investment of $50,000. The equipment has a projected salvage value of $0 at the end of the two-year project period. The annual gross income each of the next two years is projected to be $44,000 and expenses are projected to be $14,000 annually. The depreciation amount will be $25,000 annually. This profitable corporation has an incremental income tax rate of 25% and the MARR is 10%. Determine the before-tax CF for Year 2 (only – not a total).
3. Solar Solutions has purchased new manufacturing equipment that cost $400,000. Calculate the yearly tax savings from the CCA tax shield for the next three years. Assume that the income tax rate is 30%, the CCA rate is 30%, and the weighted-average cost of capital (WACC) is 12%. Assume that CCA in the first year is subject to the accelerated depreciation method for the year of acquisition. (Hint. Use Microsoft Excel to calculate the discount factor(s).) (Do not round your intermediate calculations. Round your final answers to 2 decimal places.) X Answer is complete but not entirely correct. Year 1 2 3 $ $ $ PV of Tax Savings 91,071.43 x 56,919.64 X 35,574.78 X
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A company has established a joint venture with another company to build a toll road. The initial investment is paving equipment is 34 million. the equipment will be fully depreciated using the straight-line method over its economic life of five years. Earnings before interest, taxes and depreciation collected from the toll road are projected to be 4 million per annum for 27 years starting from the end of the first year. The corporate tax rate is 20%. The required rate of return for the project under all-equity financing is 15%. The pretax cost of debt for the joint partnership is 6%. To encourage investment in the country's infrastructure, the government will subsidize the project with an 13 million, 15-year loan at an interest rate of 5% per year. All principal will be repaid in one balloon payment at the end of year 15. The NPV of the project (rounded to a whole number) is: BY

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