Vaida's Princess Playhouse Inc. was evaluating starting aCinderella division. Vaida requires a minimum 10% rateof return and it will cost $475,000.00 to build a newcastle. Vaida assumes that they will lose $100,000.00for the first two years, but, will make $75,000.00 for thenext 10 years until she retires, selling the division for$10,000.00. Should Vaida open the new division? Why?(This is not a mutually exclusive project) (Show yourwork)

To determine if Vaida should open the new division, we will analyze the project using Net Present…

Answered: Vaida's Princess Playhouse Inc. was…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 13P

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Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
Lincoln Manufacturing is considering starting a new line of business with the excess capacity it currently has on its production line. The current line is expected to last five years at the current rate of production. However, if a new line of business is taken on, then the production line will have to be replaced in three years instead of five. The new production line will last six years and would cost $100,000. What is the cost of taking on the new line of business? Round to the nearest dollar and assume a 7 percent cost of capital. $16,006 $33,132 $17,126 $20,980
Fabco, Inc., is considering purchasing flow valves that will reduce annual operating costs by $10,000 per year for the next 12 years. Fabco’s MARR is 7%/year. Using a present worth approach, determine the maximum amount Fabco should be willing to pay for the valves.
A medium-size consulting engineering firm is trying to decide whether it should remodel its office now or wait and do it one year from now. If thefirm does it now, the cost will be $38,000. The interest rate is 10% per year.a. What would the cost have to be one year from now to render the decision indifferent?b. If the cost one year from now is $41,600, should the firm remodel now or later?
Lowell Company is considering adding a robotic paint sprayer to the production line. The prayer's base price is $100,000, and it would cost another $10,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $60,000. The MACRS rates for the first three years are 33%, 45%, and 15%. The machine would require and, increase in net working capital of $5,000. The sprayer would not change revenues, but it is expected to save the firm $40,000 per year in before tax operating costs, mainly labor. Lowell's marginal tax rate (federal plus state) is 25%. If the project's cost of capital is 12%, What is the TOTAL FREE CASH FLOW FOR YEAR 3? Free cash flow = Total Initial Investment + Total annual project CF + Total Salvage Value $64,986 $90,550 $75,600 $86,050
Lowell Company is considering adding a robotic paint sprayer to the production line. The prayer's base price is $100,000, and it would cost another $10,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $33,000. The MACRS rates for the first three years are 33%, 45%, and 15%. The machine would require and, increase in net working capital of $ 6,600. The sprayer would not change revenues, but it is expected to save the firm $40,000 per year in before tax operating costs, mainly labor. Lowell's marginal tax rate (federal plus state) is 25%. If the project's cost of capital is 6%, what is the Net Salvage Value?
Your company is deciding whether to purchase a high-quality printer for your office or one of lesser quality. The high-quality printer costs $45 000 and should last five years. The lesser quality printer costs $25 000 and should last two years. If the cost of capital for the company is 12 per cent, then what is the equivalent annual cost for the best choice for the company?
Straight-Line is a company that does land surveys and engineering consulting. They have an opportunity to purchase new computer equipment that will allow them to render their drawings and surveys much more quickly. The new equipment will cost them an additional $1,200 per month, but they will be able to increase their sales by 10% per year. Their current annual cost and break-even figures are shown below. What will be the impact on the break-even point if Straight-Line purchases the new computer? What will be the impact on net operating income if Straight-Line purchases the new computer? What would be your recommendation to Staight-Line regarding this purchase? Units sold 1400 Sales price per unit $ 225 Variable cost per unit $ 145 Fixed costs $ 52,000 Break-even in units 650 Contribution margin ratio 0.36 Break-even in dollars $ 146,250 Sales $ 315,000 Variable costs $ 203,000 Fixed costs $…
Cheryl Druehl needs to purchase a new milling machine. She is considering two different competing machines. Milling Machine A will cost $300,000 and will return $80,000 peryear for 6 years, with no sa lvage value. Milling machine B will cost $220,000 and will return $60,000 for 5 years, with a salvage value of $30,000. The firm is currently using 7% as the cost of capital. Using net present value as the criterion, which machine should be purchased?
Pappy's potato has come up with a new product, the potato pet (they are freeze-dried to last longer.) Pappys paid $120,000 for a merkting survey to determine the viability of the product. it is felt that potato pet will generate sales of $915,000 per year. the fixed costs assocaited with this will be $235000 per year, and variable scosts will aount to 20 percent of sales. the equipment necessary for productionof the potato pet will cost $89000 and will be depricated in a straight-line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). this is the only initial cost for the production. The tax rate is 23 percent, and the required return is 13 percent. Calculate the A. payback period, B. NPV, C. and IRR. Show work in excel, please. Thank you.

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