You are considering whether to replace an existing flow meter. The existing meter can besold now for $50 or it can be sold in 1 year for $10. It costs $30 per year to operate andmaintain. A new meter costs $400 and has a 10-year life. It could be sold for $40 at theend of its life. The new meter costs $14 per year to operate and maintain. What do yourecommend if the cost of capital is 12% (Use the EAC method to identify which of thethree decisions is most viable)?

Answered: Image /qna-images/answer/872d5ec4-425e-43c1-bcfd-e9f3b671fe54.jpg

Answered: You are considering whether to replace…

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 considering making a movie. The movie is expected to cost $10.1 million up front and take a year to produce. After that, it is expected to make $4.3 million in the year it is released and $2.1 million for the following four years. What is the payback period of this investment? If you require a payback period of two years, will you make the movie? Does the movie have positive NPV if the cost of capital is 10.1%?
You are considering making a movie. The movie is expected to cost $10.7 million up front and take a year to produce. After that, it is expected to make $4.6 million in the year it is released and $1.6 million for the following four years. What is the payback period of this investment? If you require a payback period of two years, will you make the movie? Does the movie have positive NPV if the cost of capital is 10.1%? www
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(Calculating project cash flows and NPV) You are considering expanding your product line that currently consists of skateboards to include gas-powered skateboards, and you feel you can sell 12,000 of these per year for 10 years (after which time this project is expected to shut down with solar-powered skateboards taking over). The gas skateboards would sell for $130 each with variable costs of $25 for each one produced, and annual fixed costs associated with production would be $140,000. In addition, there would be a $1,300,000 initial expenditure associated with the purchase of new production equipment. It is assumed that this initial expenditure will be depreciated using the simplified straight-line method down to zero over 10 years. The project will also require a one-time initial investment of $30,000 in net working capital associated with inventory, and this working capital investment will be recovered when the project is shut down. Finally, assume that the firm's marginal tax…
You are considering opening a new plant. The plant will cost $95.1 million up front and will take one year to build. After that it is expected to produce profits of $31.8 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 7.6%. Should you make the investment? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. The NPV of the project will be $ million. (Round to one decimal place.)
An investor is considering financing a toll highway for $120 million. They expect to get $11 million in toll fees for each of the 30 year period they will manage the facility, but they need to pay $8 million at the end of the period to repave the highway. What is the IRR of this investment? Is is a good idea if the MARR of this company is 10% per year?
We are investing in a project, but are not sure, which one to choose. The one costs $9 million has net cash flows of $2 million annually and lasts for 7 years. The other costs $14 million and has net cash flows of $3 million annually and lasts the same period of time. The COC is 12%. Which one should we invest in among the two, since we only can afford $14 million? We are told by our boss that we have to use the IRR to do the analysis.
FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $200,000 per year. Once in production, the bike is expected to make $300,000 per year for 10 years. Assume the cost of capital is 10%. a. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment? b. By how much must the cost of capital estimate deviate to change the decision? (Hint: Use Excel to calculate the IRR.) c. What is the NPV of the investment if the cost of capital is 14%? Note: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.
A new machine will cost $400,000 and generate after-tax cash inflows of $50,000 for 12 years. Find the NPV if the firm uses a 11% opportunity cost of capital. What is the IRR? What is the payback period? (5’)
You are considering a risk-free investment that costs $4000 and pays $5000 in one year. You can either pay all cash for the investment or you can borrow part and pay cash for the other part. If you borrow $2000, you will be required to pay back $2080 in one year. The risk-free rate is 4%. What is the project’s NPV? Is the NPV affected if you borrow some of the funds?
. Consider the problem of investing in a risky project. A project costs $500. The annual cash flow for the first year are $60 and grows at the rate of 3% annually. The risk free rate is 5%. The company WACC is 12%. . Suppose the project has an option to let you wait and decide whether to accept the project. You can invest now or next year or in two years. At the end of 2 years you either invest in the project or lose it since further deferral is not possible. The project analyst has done the calculations and has produced the binomial tree showing the cash flows from the project at future dates. Calculate the NPV of the project. p_up 0.40 $80 $70 $60 $60 $50 $40 ○ $783.21 ○ $563.45 ○ $166.67 ○ $666.67

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