Vaida’s Princess Playhouse Inc. was evaluating starting a Cinderella division. Vaida requires a minimum 10% rate of return and it will cost $475,000.00 to build a new castle. Vaida assumes that they will lose $100,000.00 for the first two years, but, will make $75,000.00 for the next 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 your work)

Vaida’s Princess Playhouse Inc. was evaluating starting a Cinderella division. Vaida requires a minimum 10% rate of return and it will cost $475,000.00 to build a new castle. Vaida assumes that they will lose $100,000.00 for the first two years, but, will make $75,000.00 for the next 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 your work)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 13P

See similar textbooks

Similar questions

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
a. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $2,450,000 and will last 10 years. b. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $230,000. She estimates that the return from owning her own shop will be $55,000 per year. She estimates that the shop will have a useful life of 6 years. c. Barker Company calculated the NPV of a project and found it to be $63,900. The project's life was estimated to be 8 years. The required rate of return used for the NPV calculation was 10%. The project was expected to produce annual after-tax cash flows of $135,000. Required: 1. Compute the NPV for Campbell Manufacturing, assuming a discount rate of 12%. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV. Should the company buy the new welding system? Yes 2. Conceptual Connection: Assuming a…
Beryl's Iced Tea currently rents a bottling machine for $50,000 per year, including all maintenance expenses. It is considering purchasing a machine instead, and is comparing two options: a. Purchase the machine it is currently renting for $150,000. This machine will require $20,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $260,000. This machine will require $17,000 per year in ongoing maintenance expenses and will lower bottling costs by $15,000 per year. Also, $39,000 will be spent upfront training the new operators of the machine. Suppose the appropriate discount rate is 9% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each year, as is the rental of the machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a ten-year life with a negligible salvage value. The corporate tax rate is 20%. Should Beryl's Iced Tea…
Beryl's Iced Tea currently rents a bottling machine for $50,000 per year, including all maintenance expenses. It is considering purchasing a machine instead, and is comparing two options: a. Purchase the machine it is currently renting for $165,000. This machine will require $23,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $260,000. This machine will require $17,000 per year in ongoing maintenance expenses and will lower bottling costs by $11,000 per year. Also, $35,000 will be spent upfront training the new operators of the machine. Suppose the appropriate discount rate is 9% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each year, as is the rental of the machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a 10-year life with a negligible salvage value. The corporate tax rate is 30%. Should Beryl's Iced Tea continue…
Beryl's Iced Tea currently rents a bottling machine for $54,000 per year, including all maintenance expenses. It is considering purchasing a machine instead, and is comparing two options: a. Purchase the machine it is currently renting for $165,000. This machine will require $23,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $250,000. This machine will require $17,000 per year in ongoing maintenance expenses and will lower bottling costs by $12,000 per year. Also, $38,000 will be spent upfront training the new operators of the machine. Suppose the appropriate discount rate is 9% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each year, as is the rental of the machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a 10-year life with a negligible salvage value. The corporate tax rate is 28%. Should Beryl's Iced Tea continue…
Managers of Central Embroidery have decided to purchase a new monogram machine and are considering two alternative machines. The first machine costs $100,000 and is expected to last five years. The second machine costs $160,000 and is expected to last eight years. Assume that the opportunity cost of capital is 8 percent. Which machine should Central Embroidery purchase?
Scottech is examining an investment opportunity that will involve buying $120,000 worth of equipment. They will need $10,000 in net working capital up front. Shipping will cost $5,000 and installation will cost $10,000. The firm paid a management consultant $4,000 to analyze this project, which is supposed to increase sales by $20,000 per year. If the firm accepts the project, they will have to spend $3,500 to train the employees to use the new equipment. The corporate tax rate is 21%. What is the initial outlay for the project? ($150,500) ($130,500) ($126,500) O ($148,500) O ($123,000)
Value Lodges is the owner of an economy motel chain. Value Lodges is considering building a new 200-unit motel. The cost to build the motel is estimated at $8,000,000; Value Lodges estimates furnishings for the motel will cost an additional $700,000 and will require replacement every 5 years. Annual operating and maintenance costs for the motel are estimated to be $800,000. The average rental rate for a unit is anticipated to be $40/day. Value Lodges expects the motel to have a life of 15 years and a salvage value of $900,000 at the end of 15 years. This estimated salvage value assumes that the furnishings are not new. Furnishings have no salvage value at the end of each 5-year replacement interval. Assuming average daily occupancy percentages of 50%, 60%, 70%, 80% for years 1 through 4, respectively, and 90% for the 5th through 15th years, MARR of 12%/yr, 365 operating days/year, and ignoring the cost of land, should the motel be built? Base your decision on an internal rate of return…
You are the CFO of Oriole, Inc., a retailer of the exercise machine Slimbody6 and related accessories. Your firm is considering opening up a new store in Los Angeles. The store will have a life of 20 years. It will generate annual sales of 4,000 exercise machines, and the price of each machine is $2,500. The annual sales of accessories will be $600,000, and the operating expenses of running the store, including labor and rent, will amount to 50 percent of the revenues from the exercise machines. The initial investment in the store will equal $30,900,000 and will be fully depreciated on a straight-line basis over the 20-year life of the store. Your firm will need to invest $1,000,000 in additional working capital immediately, and recover it at the end of the investment. Your firm's marginal tax rate is 30 percent. The opportunity cost of opening up the store is 10.80 percent. What are the incremental free cash flows from this project at the beginning of the project as well as in years…
Concord Pacific is considering purchasing a small residential building in Abbotsford that will cost $1,700,000 and will require $120,000 in renovations immediately. Revenue from rent is estimated to be $500,000 a year. Expenses are estimated to be $200,000 a year. They plant to keep the building for 6 years and estimates they will be able to sell the building for $2,200,000 at the end of 6 years. Assume expenses occur at the beginning of the year and revenue at the end of the year. Concord wants to earn at least 18% per year. Concord has calculated the NPV of this project is -$81,683.54. To encourage businesses to invest, the provincial government is considering giving Concord a one-time tax credit payable at the end of 2 years. How large of a tax credit does Concord require if they want to earn at a minimum of 18% per year?
You are the CFO of Carla Vista, Inc., a retailer of the exercise machine Slimbody6 and related accessories. Your firm is considering opening up a new store in Los Angeles. The store will have a life of 20 years. It will generate annual sales of 4,000exercise machines, and the price of each machine is $2,500. The annual sales of accessories will be $600,000, and the operating expenses of running the store, including labor and rent, will amount to 50percent of the revenues from the exercise machines. The initial investment in the store will equal $26,800,000 and will be fully depreciated on a straight-line basis over the 20-year life of the store. Your firm will need to invest $3,000,000 in additional working capital immediately, and recover it at the end of the investment. Your firm’s marginal tax rate is 30 percent. The opportunity cost of opening up the store is 13.70 percent. What are the incremental free cash flows from this project at the beginning of the project as well as in…
Nashua is looking into the option of expanding its dyeing business. Business is booming, and Nashua is considering buying a new printer. Two printers are available on the market: printer X costs R60,000, requires R 6,000 per year to operate, and has a useful life of two years; printer Y costs R70,000, requires R8,000 per year to operate, and will need to be replaced every three years. Nashua’s cost of capital is 10 percent. Required: 3.1. What are the present values of the total costs of the two printers over their useful life? 3.2. Why are the two present values not comparable? 3.3. What is the annual-equivalent cost for each of the printers? 3.4. Which printer should Nashua purchase?