You are evaluating a potential investment in equipment. The equipment's basic price is$163,000, and shipping costs will be $4,900. It will cost another $21,200 to modify it forspecial use by your firm, and an additional $8,200 to install it. The equipment falls in theMACRS 3-year class that allows depreciation of 33% the first year, 45% the second year, 15%the third year, and 7% the fourth year. You expect to sell the equipment for 29,600 at the endof three years. The equipment is expected to generate revenues of $151,000 per year withannual operating costs of $77,000. The firm's marginal tax rate is 40.0%. What is the after-taxoperating cash flow for year 2?$79,914-$8,871$74,000-$14,785$88,785

Operating cash flow is the amount which is earned by the investor from the investment. It includes…

Answered: You are evaluating a potential…

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 portable concrete test instrument used in construction for evaluating and profiling concrete surfaces (MACRS-GDS 5-year property class) is under consideration by a construction firm for $ 25,000. The instrument will be used for 6 years and be worth $ 3,000 at that time. The annual cost of use and maintenance will be $ 9,000. Alternatively, a more automated instrument (same property class) available from the manufacturer costs $ 30,500, with use and maintenance costs of only $ 8,000 and salvage value after 6 years of $2,500. The marginal tax rate is 25%, and MARR is an after-tax 12%. Show the AW values used to make your decision:
Ogren Corporation is considering purchasing a new spectrometer for the firm's R&D department. The purchase price is $70,000 and it would cost another $15,000 to install it. The spectrometer which falls into the MACRS 3-year property class (Year 1-33.33%, Year 2 - 44.44%, Year 3 - 14.82%, and Year 4 - 7.41%) is projected to be sold after three years for $30,000. Use of this equipment would result in an increased net working capital of $4,000 over the life of the machine. The spectrometer would have no effect on revenues, but it is expected to save the firm $35,000 per year in before-tax operating costs, mainly labor. The firm's tax rate is 40%, and the required rate of return on the project is 11%. What amount should be used as the initial cash flow for this project? Why? Short Answer Toolbar navigation
A construction company is evaluating two options for an elevator, each of which has a useful life in 10 years. Option 1 costs $45, 000 to install and $2700 annually, with a salvage value of $ 3000 in year 10. Option 1 also requires a significant overhaul in year 6 with a cost of $8, 000. Option 2 costs $54, 000, costs $2, 800 annually, and has a salvage value of $5000 in year 10. Annual interest is 4%, compounded monthly. Which option would you choose? Show your work.
Please show proper steps.
You have been asked by the president of your company to evaluate the proposed acquisition of a piece of new equipment for the firm's R&D department. The equipment's price is $30,000, and would be sold after 2 years for $5,000. The equipment is depreciated straight-line to zero over 2 years. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000, which will be recovered when the equipment is sold. The equipment is expected to generate sales of $35,000 per year and operating costs (excluding depreciation) by $10,000 per year. The firm's marginal tax rate is 40%.
You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $150,000, and it would cost another $22, 500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $52, 500. The applicable depreciation rates are 33%, 45% , 15%, and 7%. The equipment would require a $13, 000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $30,000 per year in before - tax labor costs. The firm's marginal federal - plus - state tax rate is 40%. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign. $ What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent. In Year 1 $ In Year 2…
Argyl Manufacturing is evaluating the possibility of expanding its operations. This expansion will require the purchase of land at a cost of $150,000. A new building will cost $120,000 and will be depreciated on a straight-line basis over 10 years to a salvage value of $0. Actual land salvage at the end of 10 years is expected to be $200,000. The actual building salvage at the end of 10 years is expected to be $190,000. Equipment for the facility is expected to cost $260,000. Installation costs will be an additional $20,000 and shipping costs will be $13,000. This equipment will be depreciated as a 7-year MACRS asset. Actual estimated salvage at the end of 10 years is $0. The project will require net working capital of $75,000 initially (year 0), an additional $40,000 at the end of year 1, and an additional $40,000 at the end of year 2. The project is expected to generate increased EBIT (operating income) for the firm of $110,000 during year 1. Annual EBIT is expected to grow at a rate…
Please show all your work
You are evaluating the proposed acquisition of a new machine costing $50,000, and it falls into the MACRS 3-year class. Purchase of the machine would require an increase of net operating working capital of $2,000, which will be recovered when the machine is sold. The machine would increase the firm's revenues by $27,000 per year and its operating costs by $16,000 per year. The machine is expected to be used only for 3 years and then be sold for $25,000. The firm's marginal tax rate is 27 percent, and the project's cost of capital is 14 percent. What is the non-operating terminal cash flows at year 3? MACRS 3-year schedule is as follows: 33%, 45%, 15%, and 7% for years 1 to 4, respectively. Question 13 options: $20,145 $20,455 $20,725 $20,975 $21,195 $21,505
A proposed cost-saving device has an installed cost of $765,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes (MACRS schedule). The required initial net working capital investment is $67,000, the tax rate is 21 percent, and the project discount rate is 9 percent. The device has an estimated Year 5 salvage value of $103,000. What level of pretax cost savings do we require for this project to be profitable? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Pretax cost savings
A proposed cost-saving device has an installed cost of $825,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes (MACRS schedule). The required initial net working capital investment is $91,000, the tax rate is 23 percent, and the project discount rate is 9 percent. The device has an estimated Year 5 salvage value of $139,000. What level of pretax cost savings do we require for this project to be profitable? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Pretax cost savings
You must evaluate the purchase of a spectrometer for the R&D department. The base price is $140,000, and it would cost another $30,000 to modify the equipment for special use by the firm. The equipment falls into the MACRS 4 year class and would be sold after 4 years for $60,000. The applicable depreciation rates are 33%, 45%, 15% and 7%. The equipment would require an $8000 increase in net operating working capital. The project would have no effect on revenues, but it should save the firm $50,000 per year before-tax labour costs. The firm's marginal federal-plus state tax rate is 40%. QUESTION: If the WACC is 12%, should the spectrometer be purchased? Explain.

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