The Wildcat Oil Company is trying to decidewhether to lease or buy a new computer-assisteddrilling system for its oil exploration business.Management has already determined thatacquisition of the system has a positive NPV. Thesystem costs $9.78 million and qualifies for a 25%CCA rate. The equipment will have a $994,000salvage value in 5 years. Wildcat's tax rate is 36%,and the firm can borrow at 9.0%. SouthtownLeasing Company has offered to lease the drillingequipment to Wildcat for payments of $2.53 millionper year. Southtown's policy is to require its lesseesto make payments at the start of the year.

Lease vs. Buy Decision for Wildcat Oil CompanyHere's a breakdown to help Wildcat Oil Company decide…

Answered: The Wildcat Oil Company is trying to…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 8P: The Rodriguez Company is considering an average-risk investment in a mineral water spring project...

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Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial $5 million investment in net operating working capital. The company’s tax rate is 25%. What is the initial investment outlay? The company spent and expensed $150,000 on research related to the new product last year. What is the initial investment outlay? Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. What is the initial investment outlay?
The Wildcat Oil Company is trying to decide whether to lease or buy a new computer- assisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $2.7 million in annual pretax cost savings. The system costs $7.5 million and will be depreciated straight-line to zero over 5 years. Wildcat's tax rate is 24 percent, and the firm can borrow at 6 percent. Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $1.71 million per year. Lambert's policy is to require its lessees to make payments at the start of the year. a. What is the NAL for Wildcat? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) b. What is the maximum lease payment that would be acceptable to the company? (Do not round intermediate calculations and…
Pulaski Starlight Inc. is evaluating a project. The project is expected to generated new sales of $1,718,798 and incur costs of $606,990 annually. The project will be depreciated using the MACRS approach. The equipment needed for the project will cost $4,495,137 and is considered to be a five year MACRS class. The company's tax rate is 28%. Given this information, what would be the project's third year operating cash flow? Answer in dollars and cents.
Cori's Meats is looking at a new sausage system with an installed cost of $440,000. The system qualifies for 100 percent bonus depreciation, but at the end of the project in 5 years the sausage system can be scrapped for $62,000. The sausage system will save the firm $215,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $21,000. If the tax rate is 23 percent and the discount rate is 10 percent, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Techno Lab, a taxpaying entity, estimates that it can save $30,000 a year in cash operating costs for the next 10 years if it buys a special-purpose eye-testing machine at a cost of $135,000. No terminal disposal value is expected. Techno Labs' required rate of return is 10%. Assume all cash flows occur at year-end except for initial investment amounts. Techno Labs uses straight-line depreciation. The income tax rate is 34% for all transactions that affect income taxes. . Requirement 1. Calculate the following for the special-purpose eye-testing machine: Net present value (NPR) (Round interim calculations and your final answers to the nearest whole dollar. Use a minus sign or parentheses for a negative net present value.) 1. Calculate the following for the special-purpose eye-testing machine: a. Net present value b. Payback period c. Internal rate of return d. Accrual accounting rate of return based on net initial…
Carousel Company is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $400,000. The annual cost savings if the new machine is acquired will be $100,000. The machine will have a 6-year life, at which time the terminal disposal value is expected to be $50,000. Carousel Company is assuming no tax consequences. If Carousel Company has a required rate of return of 8%, which of the following is closest to the present value of the project? a. $34,836 b. $5,264 c. $93,800 d. $300,000
Elder, Inc. is considering the purchase of a new air-handling system that will have no effect on revenues but will save $50,000 in energy costs each year it is used. The system costs $120,000 and will be depreciated on a straight-line basis to $0 over 4 years. The system can be sold after six years for $25,000. If the Tax Rate is 20% and the opportunity cost of capital is 13%, what is the project’s Net Present Value (rounded to the nearest dollar)? Multiple Choice $67,355 $66,134 None of the above $72,158 $69,757
Longshore Drilling Company (LDC) is a contracting company that lays oil pipeline infrastructure. LDC is considering purchasing a piece of excavating equipment worth $5,000,000. The machine would generate a net $300,000 yearly pre-tax cash flows. The machine would be depreciated over the course of 20 years, at which time it is predicted to have a disposal value of $500,000. LDC’s tax rate is 20%, and the discount rate is 10%. The Excess Present Value Index of the proposed machinery (rounded to 4 decimal places) is closest to which of the following? Select one: a. 0.4718 b. 0.4539 c. 2.1617 d. 0.5001 e. 1.2748
Dog Up! Franks is looking at a new sausage system with an installed cost of $685,000. This cost will be depreciated straight-line to zero over the projects 5 year life, at the end of which the sausage system can be scrapped for $91,000. The sausage system will save the firm $195,000 per year in pretax operating costs, and the system requires an initial investment in NWC of $47,000. If the tax rate is 21% and the discount rate is 10%, what is the NPV of this project?
ASB is considering leasing a new machine. The lease calls for 9 payments of $1,403 per year with the first payment occurring immediately. The machine costs $8,683 to buy. The present value of CCA tax shield is $998. The present value of its salvage value is $496 and the present value of CCA recapture is $61. ASB firm can borrow at a rate of 10%. The corporate tax rate is 30%. What is the NPV of leasing?
XYZ is considering buying a new, high efficiency interception system. The new system would be purchased today for $47,700.00. It would be depreciated straight-line to SO over 2 years. In 2 years, the system would be sold for an after-tax cash flow of $14,600.00. Without the system, costs are expected to be $100,000.00 in 1 year and $100,000.00 in 2 years. With the system, costs are expected to be $79,000.00 in 1 year and $69,700.00 in 2 years. If the tax rate is 46.50% and the cost of capital is 8.40%, what is the net present value of the new interception system project? a. $11893.11 (plus or minus $50) b. $12724.27 (plus or minus $50) c. $8553.76 (plus or minus $50) d. $9953.14 (plus or minus $50) e. None of the above is within $50 of the correct answer

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