The president of the company you work for has asked you to evaluate the proposed acquisition of a new chromatograph for the firm's R&D department. The equipment's basic price is $79,000, and it would cost another $14,500 to modify it for special use by your firm. The chromatograph, which falls into the MACRS 3-year class, would be sold after 3 years for $32,000. The MACRS rates for the first 3 years are 0.3333, 0.4445 and 0.1481. Use of the equipment would require an increase in net working capital (spare parts inventory) of $2,960. The machine would have no effect on revenues, but it is expected to save the firm $28,240 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40%. Cash outfiows and negative NPV value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar. a. What is the Year-0 net cash flow? b. What are the net operating cash flows in Years 1, 2, and 37 Do not include recovery of Nwc or salvage value in Year 3's calculation here. Year 1: Year 2: Year 3: c. What is the additional cash flow in Year 3 from NWC and salvage?

The president of the company you work for has asked you to evaluate the proposed acquisition of a new chromatograph for the firm's R&D department. The equipment's basic price is $79,000, and it would cost another $14,500 to modify it for special use by your firm. The chromatograph, which falls into the MACRS 3-year class, would be sold after 3 years for $32,000. The MACRS rates for the first 3 years are 0.3333, 0.4445 and 0.1481. Use of the equipment would require an increase in net working capital (spare parts inventory) of $2,960. The machine would have no effect on revenues, but it is expected to save the firm $28,240 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40%. Cash outfiows and negative NPV value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar. a. What is the Year-0 net cash flow? b. What are the net operating cash flows in Years 1, 2, and 37 Do not include recovery of Nwc or salvage value in Year 3's calculation here. Year 1: Year 2: Year 3: c. What is the additional cash flow in Year 3 from NWC and salvage?

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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You are evaluating the proposed acquisition of a new machine costing $50,000, and it falls into the MACRS 3-year class. Purchase of the machine would require an increase of net operating working capital of $2,000, which will be recovered when the machine is sold. The machine would increase the firm's revenues by $27,000 per year and its operating costs by $16,000 per year. The machine is expected to be used only for 3 years and then be sold for $25,000. The firm's marginal tax rate is 27 percent, and the project's cost of capital is 14 percent. What is the non-operating terminal cash flows at year 3? MACRS 3-year schedule is as follows: 33%, 45%, 15%, and 7% for years 1 to 4, respectively. Question 13 options: $20,145 $20,455 $20,725 $20,975 $21,195 $21,505
You are currently working in a construction company. Your company have been appointed to a Build-Operate-Transfer project for UPM for the renovation of a student hostel. The contract involves an 80%-20% financing, in which your company will be financing 20% of the initial cost and will be allowed to collect the lease from the tenants for the first 7 years. You have received 3 different renovation designs for the hostel, each with different initial cost and projected yearly return from the concession as shown in Table 1 below. Table 1: Projected yearly return based on the design type (RM 'million) Design A (Initial cost RM5 mil) 290,000 290,000 300,000 290,000 310,000 320,000 330,000 Design B (Initial cost RM4.8 mil) 300,000 290,000 290,000 280,000 290,000 280,000 300,000 Design C (Initial cost RM5.5 mil) 300,000 310,000 310,000 300,000 290,000 300,000 290,000 Year 1 3 4 6 7 Your boss had requested you to select the best design that will give the best profit to the company. For this…
The Johnson Chemical Company has justreceived a special subcontracting job from one of itsclients. The two-year project requires the purchaseof a special-purpose painting sprayer of $60,000.This equipment falls into the MACRS five-yearclass. After the subcontracting work is completed,the painting sprayer will be sold at the end of twoyears for $40,000 (actual dollars). The painting system will require an increase of $5,000 in net working capital (for spare-parts inventory, such as spraynozzles). This investment in working capital will befully recovered after the project is terminated. Theproject will bring in an additional annual revenueof $120,000 (today’s dollars), but it is expected toincur an additional annual operating cost of $60,000(today’s dollars). It is projected that, due to inflation, sales prices will increase at an annual rate of5%. (This implies that annual revenues will increaseat an annual rate of 5%.) An annual increase of 4%for expenses and working-capital…
You must evaluate the purchase of a proposed spectrometer for the RAD department. The base price is $120,000, and it would cost another $30,000 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $42,000. The applicable depreciation rates are 33%, 45%, 15%, and 75%. The equipment would require a $50,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $32,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%. Using the same data above, instead of MACRS depreciation method, the entity will use the straight-line method. Determine: 1. Project’s annual cash flows in Years 1, 2 and 3. 2. Calculate NPV, using the 12% WACC. 3. Should the equipment be purchased using the straight-line method of depreciation? Why?
St. Anthony’s College is considering the replacement analysis of a concrete mixer. The old mixer has annual operating and maintenance costs of P35,000/yr. It can be kept for 5 years more. The old mixer can be sold to the manufacturer of the new mixer for P15,000. The new mixer will have a purchase price of P45,000 and it will have a value of P10,000 in five years’ time; and it will have annual operating and maintenance costs of P20,000/yr. If money is worth 15%, would you recommend for the replacement of the old concrete mixer?
We assume that the company that you selected is considering a new project. The project has 8 years' life. This project requires an initial investment of $580 million to purchase equipment, and $30 million for shipping & installation fees. The fixed assets fall in the 7-year MACRS class. The salvage value of the fixed assets is 10% of the purchase price (including the shipping & installation fee). The number of units of the new product expected to be sold in the first year is 2,660,000 and the expected annual growth rate is 10.5%. The sales price is $280 per unit and the variable cost is $225 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 3.0%. The required net operating working capital (NOWC) is 11.8% of sales with the corporate tax rate of 21%. The project is assumed to have the same risk as the corporation, so 5.35% is the discount rate for this hypothetical project. Estimate annual cash flows for the 8 years.…
The company would like you to look at a new project. This project involves the purchase of a new $2,000,000 fully auto mated plasma cutter that can be used in our metal works division. The products manufactured using the new technol ogy are expected to sell for an average price of $300 per unit, and the company analyst expects that the firm can sell 20,000 units per year at this price for a period of five years. The cutter will have a residual or savage value of $200,000. at the end of the project's five-year te. The firm also expects to have to invest an additional $300,000 in working capital to support the new business. Other pertinent Information concerning the business venture is as follows: (look at the picture attached) a) Estimate the cash flows for the investment under the listed base-case assumptions. Calculate the project NPV for these cash flows. b) Evaluate the NPV of the investment under the worst-case and best-case assumptions.
You must evaluate a proposal to buy a new milling machine. The base price is $101,000, and shipping and installation costs would add another $12,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $45,450. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $4,500 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $52,000 per year. The marginal tax rate is 35%, and the WACC is 11%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest cent.$ What are the project's annual cash flows during Years 1, 2, and 3? Do not round intermediate calculations.…
Tim Inc. is considering an initial investment of $2 million in a robotic equipment that would improve the production process and reduce the operating cost. The robotic equipment has an economic life of 20 years, at the end of which, the seller will buy back the equipment for $500,000. Using cost of capital of 15% effective, Tim Inc. estimated the NPV is -$12,500. (a) If the seller agree to give you a rebate at the end of first year, How large would that rebate need to be in order for you to accept this investment? (b) If the rebate is not given, how much should the buyback price be in order for this investment to be acceptable?
4. You have been asked by the president of your company to evaluate the proposed acquisition of a new flux capacitor for the firm's R&D department. The equipment's basic price is $70,000 and it would cost another $15,000 to modify it for special use by your firm. The flux capacitor, which has a MACRS 3-year recovery period, would be sold after 3 years for $30,000. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000. The flux capacitor would have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. If the project's cost of capital is 10 percent, should the flux capacitor be purchased?
Riverview Company is evaluating the proposed acquisition of a new production machine. The machine's base price is $200,000, and installation costs would amount to $28,000. Also, $10,000 in net working capital would be required at installation. The machine will be depreciated for 3 years using simplified straight line depreciation. The machine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine in place for 5 years. At the end of the fifth year, the machine will be sold for $20,000. Riverview has a cost of capital of 12% and a marginal tax rate of 34%. What is the IRR of the project? 14.1% O 31.3% 9.5% O 28.2% O 19.7%
You are evaluating the proposed acquisition of a new machine costing $57,000, and it falls into the MACRS 3-year class. Purchase of the machine would require an increase of net operating working capital of $4,000, which will be recovered when the machine is sold. The machine would increase the firm's revenues by $30,000 per year and its operating costs by $17,000 per year. The machine is expected to be used only for 3 years and then be sold for $25,000. The firm's marginal tax rate is 27 percent, and the project's cost of capital is 14 percent. What is the non-operating terminal cash flows at year 3? MACRS 3-year schedule is as follows: 33%, 45%, 15%, and 7% for years 1 to 4, respectively. Question 13 options: $22,267 $22,587 $22,907 $23,097 $23,327 $23,607

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