You are asked to evaluate the following project for a corporation with profitable ongoing operations. The required investment on January 1 of this year is $31.000. The firm will depreciate the investment at a CCA rate of 20 percent. The firm is in the 40 percent tax bracket. The price of the product on January 1 will be $106 per unit. That price will stay constant in real terms. Labour costs will be $15.20 per hour on January 1. They will increase at 1 percent per year in real terms. Energy costs will be $7.30 per physical unit on January 1; they will increase at 2.5 percent per year in real terms. The inflation rate is 3.2 percent. Revenue is received and costs are paid at year-end: Year 1 Year 2 Yean 3 Year 4 Physical production, in units Labour input, in hours Energy input, physical units 170 340 390 170 1,120 180 1,120 180 1,120 1,120 180 180 The risk-free nominal discount rate is 77 percent. The real discount rate for costs and revenues is 4.7 percent. Calculate the NPV of this project. (Do not round intermediote calculations. Round the answer to 2 decimal places. Negative amount should be indicated by a minus sign. Omit S sign in your response.) Net present value

You are asked to evaluate the following project for a corporation with profitable ongoing operations. The required investment on January 1 of this year is $31.000. The firm will depreciate the investment at a CCA rate of 20 percent. The firm is in the 40 percent tax bracket. The price of the product on January 1 will be $106 per unit. That price will stay constant in real terms. Labour costs will be $15.20 per hour on January 1. They will increase at 1 percent per year in real terms. Energy costs will be $7.30 per physical unit on January 1; they will increase at 2.5 percent per year in real terms. The inflation rate is 3.2 percent. Revenue is received and costs are paid at year-end: Year 1 Year 2 Yean 3 Year 4 Physical production, in units Labour input, in hours Energy input, physical units 170 340 390 170 1,120 180 1,120 180 1,120 1,120 180 180 The risk-free nominal discount rate is 77 percent. The real discount rate for costs and revenues is 4.7 percent. Calculate the NPV of this project. (Do not round intermediote calculations. Round the answer to 2 decimal places. Negative amount should be indicated by a minus sign. Omit S sign in your response.) Net present value

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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A new electronic process monitor costs $7,000,000. This cost could be depreciated at 30% peryear (CCA Class 10). The monitor could be sold for $1,428,595 at the end of five years. The newmonitor would save the firm $2,400,000 before taxes in annual operating costs for the five years.There would be no impact on net working capital. The firm’s weighted average cost of capital is15% and the corporate tax rate is 40% What would be the NPV of purchasing this system?
Your firm is contemplating the purchase of a new $540,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $68,000 at the end of that time. You will be able to reduce working capital by $93,000 (this is a one-time reduction). The tax rate is 21 percent and the required return on the project is 9 percent. If the pretax cost savings are $150,000 per year, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV Will you accept or reject the project? Accept Reject If the pretax cost savings are $115,000 per year, what is the NPV of this project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV Will you accept or reject the project? Reject Accept At what level of pretax cost savings would you be indifferent between accepting the…
A company is developing a new product. The development of the product requires an initial investment of $150,000 with further investments of $70,000 in year 1, $40,000 in year 2 and $20,000 in year 3. The company will launch the product on the market in year 3 and the company expects annual profits of $40,000 from year 3 to year 8. At the end of year 8, the company expects to terminate the production line and sell it to a competitor for $70,000. The company's required rate of return is 7%. a. Calculate the NPV for this product. -$37,562.00 8) Round to the nearest cent b. Should the company proceed with developing the product?
The Cement Company has revenues of $100,000 in year 1 and it is expected to grow by 15% in year 2 and 25% in year 3. Operating expenses inclusive of depreciation are $75,000 in year 1 and are expected to increase by 10% per year, the depreciation is expected to be calculated on a straight-line method on a piece of equipment that costs $90,000, and the company marginal tax rate is 40 percent. In addition, the Cement Company expects that it will have to add about $8,000 per year to its net working capital in years 1 to 3. Calculate the company's Net (operating) cash flow for years 1, 2, and 3.
You are considering adding a new product to one of your firm’s existing product lines which will generate an additional $200,000 in sales per year and will have a margin of 50% (same as the existing group margin). This will entail an increase in Net Working Capital of $10,000 and an investment in property, plant, and equipment of $50,000 per year. Assuming the company pays no tax and any depreciation in that year is negligible, the annual change in Unlevered Free Cash Flows resulting from the addition of the product is: a $40,000 b $50,000 c $90,000 d $100,000 e $10,000
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. After careful study, Oakmont estimated the following costs and revenues for the new product: When the project concludes in four years the working capital will be released for investment elsewhere within the company. Required: Using Excel (this will save you time and effort) answer the following: Oakmont’s cost of capital is 15%, and management does not feel it should have any adjustment for risk, compute the NPV. Same situation as (a), but management does feel this project does possess a greater than average risk, so 19% should be the required rate of return. Compute the NPV. Management is concerned that Sales Revenues and Expenses could be rising due to inflationary factors. So the projection for year 1 is as shown, but that sales revenues will grow by 2% per year for years 2-4; and that variable expenses will grow by 4% per year for years 2-4, and that fixed out-of-pocket operating…
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A firm has invested $50,000 in equipment with a 5-year useful life. The machinery will have a salvage value of $5,000. The annual benefits from the machinery are $13,000 for the first year and increase by $2,000 per year. Assume a combined 30% income tax rate, and the firm uses the SOYD depreciation. Calculate the before-tax IRR. Calculate the after-tax IRR.
You are an employee of University Consultants, Limited, and have been given the following assignment. You are to present an investment analysis of a small retail income-producing property for sale to a potential investor. The asking price for the property is $1,430,000; rents are estimated at $183,040 during the first year and are expected to grow at 2.5 percent per year thereafter. Vacancies and collection losses are expected to be 10 percent of rents. Operating expenses will be 35 percent of effective gross income. A fully amortizing 70 percent loan can be obtained at 8 percent interest for 30 years (total annual payments will be monthly payments × 12). The property is expected to appreciate in value at 4 percent per year and is expected to be owned for five years and then sold. Required: a. What is the first-year debt coverage ratio? b. What is the terminal capitalization rate? c. What is the investor’s expected before-tax internal rate of return on equity invested (BTIRR)? d. What…
Lobster Seafood Corp. is planning to build a new shipping depot. The initial cost of the investment is $1.18 million. Efficiencies from the new depot are expected to generate an annual after-tax cost reduction of $105,000 forever. The corporation has a total value of $65 million and has outstanding debt of $45 million. What is the NPV of the project if the firm has an aftertax cost of debt of 5.8 percent and a cost equity of 12.6 percent? $244,843 $150,409 $480,584 $67,715
You are a consultant who was hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $10 million. The product will generate free cash flow of $750,000 the first year, and this free cash flow is expected to grow at a rate of 3% per year. Markum has an equity cost of capital of 11.3%, a debt cost capital of 4.33%, and a tax rate of 25%. Markum maintains a debt-equity ratio of 0.50. How much debt will Markum initially take on as a result of launching this product line? a) $2.34 million b) $4.29 million c) $3.70 million d) $2.94 million e) None of the answers is correct
A firm has an average investment of $20,000 during the year. During the same period, the firm generates an after-tax income of $5,000. The cost of capital is 20 percent. Required: a) Calculate the economic value added (EVA) for the firm. b) Calculate the net return on the investment (ROI) for the firm.

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