The Papillon Corporation is considering launching a new project, and it would like to dothe math to figure out if it is worth it.The Papillon Corporation has no loans, and currently its cost of equity is 11.6 %.The project would require an immediate investment of $11.67 million to buy productionequipment. The equipment will depreciate according to the straight-line method, andits economic life is 6 years. The Papillon Corporation expects that this 6-year-long project would bring "revenues minus costs of goods sold in the amount of $3.37million each year. (Use the company's cost of equity to discount their after-tax values.)You also know that the T-Bill, or the risk-free, rate is 3.5 % per year. (Use this rate todiscount the risk-free cash flows from this project, such as the annual "depreciationtax shields" (HINT: see Ch.6 PowerPoint!).)The Papillon Corporation faces a 24 % income tax rate.First, find the project's estimated unlevered cash flows, and then calculate the project'sunlevered net present value. (Do not round intermediate calculations and enter youranswer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,1,234,567.89)Net present value

An unlevered firm is contemplating upon a new project. Quantum and timing of cash flows emanating…

Answered: The Papillon Corporation is considering…

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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Salvage Co. is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin. The new ship would cost P500,000 and would be fully depreciated by the straight-line method over 10 years. At the end of 10 years, the ship will have no value and will be sunk in some already polluted harbor. The Salvage Co.'s cost of capital is 12 percent, and its marginal tax rate is 40 percent. The ship produces equal annual labor cost savings over its 10-year life. What is the present value of the depreciation tax benefit of the new ship? (Round to the nearest peso.) P200,000 P169,506 P282,510 P113,004
Blue Sky Corporation is trying to decide whether to invest in equipment to manufacture a new product. If the investment project is accepted, sales revenue will increase by $78,000 per year and materials costs will decrease by $47,000 per year. The equipment will cost $244,000 and is depreciable over 14 years using simplified straight line (zero salvage value). The firm has a marginal tax rate of 34%. Calculate the firm's annual cash flows resulting from the new project. ENTER YOUR ANSWER IN THE SPACE PROVIDED. DO NOT ENTER THE DOLLAR SIGN.
b. Cendrawasih Inc. is considering replacing the equipment it uses to produce crayons. The equipment would cost RM1.37 million, have a 12-year life, and lower manufacturing costs by an estimated RM304,000 a year. The equipment will be depreciated using straight-line depreciation to a book value of zero. The required rate of return is 15 percent and the tax rate is 35 percent. Determine the net income from this proposed project.
Sagar
A corporation is considering purchasing a machine that will save $150,000 per year before taxes. The cost of operating the machine (including maintenance) is $30,000 per year. The machine will be needed for five years, after which it will have a zero salvage value. MACRS depreciation will be used, assuming a three-year class life. The marginal income tax rate is 25%. If the firm wants 15% return on investment after taxes, how much can it afford to pay for this machine? If the firm wants 15% return on investment after taxes, it can afford to pay ?.
Your company is about to undertake a major investment project. The project will require an initial investment of $200 million in a machine plus another $35 million for working capital. Tax authorities will allow you to depreciate the machine on a straight-line basis over four years to a salvage value of zero. In fact, however, you expect that you can sell the machine for $30 million at the end of Year 4. You will need to have a working capital balance on hand at the end of each year equal to 30% of that year’s sales. The working capital can be fully recovered at the end of the project’s life. You expect that the project will generate $100 million in sales and $40 million in cash operating expenses (excluding depreciation) during each of the next four years. The corporate tax rate is 40%. The discount rate is 7.25%. What is NPV of this project?
A construction company is deciding to undertake a project. The project is quite profitable as it will generate net cash inflows of $20 million per year for 5 years. However, it will cause pollution to the nearby residents. The company can mitigate this pollution by investing additional 10 million at Year 0 but legally it is not compulsory for it to do so. Undertaking this project would cost $60 million without mitigation. If the firm does invest in mitigation, the annual cash inflows would be $22 million. The risk adjusted WACC is 12%. Calulate the Payback with and without mitgationwhat is the discounted payback with and without mitigation?Should the project be undertaken? If so, should the firm do mitigation? (hint: discuss all the criterias you have calculated in earlier parts)How should the environmental effects be dealt with when this project is evaluated
A Builder company is deciding to undertake a project. The project is quite profitable as it will generate net cash inflows of $20 million per year for 5 years. However, it will cause pollution to the nearby residents. The company can mitigate this pollution by investing additional 10 million at Year 0 but legally it is not compulsory for it to do so. Undertaking this project would cost $60 million without mitigation. If the firm does invest in mitigation, the annual cash inflows would be $22 million. The risk adjusted weighted average cost of capital is 12%. Calculate the Net Present Value and IRR with and without mitigation. Should the project be undertaken? If so, should the firm do mitigation?
A company is investing in a solar panel system to reduce its electricity costs. The system requires a cash payment of $125,374.60 today. The system is expected to generate net cash flows of $13,000 per year for the next 35 years. The investment has zero salvage value. The company requires an 8% return on its investments. Compute the net present value of this investment.
Fitzgerald Computers is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will have zero book value, and it will be depreciated by the straight-line method over 3 years. Revenues and other operating costs are expected to be constant over the project's 4-year life. What is the project's Year 4 cash flow? $65,000 Equipment cost (depreciable basis) Straight-line depreciation rate Sales revenues, each year Operating costs (excl. deprec.) Tax rate a. $27,500 b. $28,438 c. $22,750 d. $21,000 e. $30,333 33.33% $60,000 $25,000 35.0%
Van Nuys Company is considering the purchase of a new machine which will cost $7.370. The machine will provide revenues of $4,000 per year. The cash operating costs will be $2,000 per year. The new machine will have a useful life of six years. The company's cost of capital is 12 percent. Ignore income taxes. Should the company buy the new machine? Yes, because NPV=0 and IRR0 and IRR>Cost of Capital No, because NPV>0 and IRR0 and IRR>Cost of Capital O Yes, because NPV = IRR Question 4

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