You are evaluating two different silicon wafer milling machines. The Techron I costs$300,000, has a three-year life, and has pretax operating costs of $83,000 per year. TheTechron Il costs $520,000, has a five-year life, and has pretax operating costs of$49,000 per year. For both milling machines, use straight-line depreciation to zero overthe project's life and assume a salvage value of $60,000. If you tax rate is 24 percentand your discount rate is 12 percent, compute the EAC for both machines. (A negativeanswer should be indicated by a minus sign. Do not round intermediate calculationsand round your answers to 2 decimal places, e.g., 32.16.)Techron ITechron II

Calculation of EAC of Techron I and Techron II:The EAC is calculated using a excel spreadsheet. The…

Answered: You are evaluating two different…

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 must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $100,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $28,000. The equipment would require a $12,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $22,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%. What is the initial investment outlay for the spectrometer after bonus depreciation is considered, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar. What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.
Mike's landscaping is considering a new 4-year project. The necessary fixed assets will cost $157,000 and be depreciated on a 3-year MACRS and have no salvage value. The MACRS percentages each year are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. The project will have annual sales of $98,000, variable costs of $27,400, and fixed costs of $12,000. The project will also require net working capital of $2,600 that will be returned at the end of the project. The company has a tax rate of 21 percent and the project's required return is 10 percent. What is the net present value of this project?
Consider the following project of Hand Clapper, Incorporated. The company is considering a four-year project to manufacture clap-command garage door openers. This project requires an initial investment of $14 million that will be depreciated straight- line to zero over the project's life. An initial investment in net working capital of $590,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $11.6 million in pretax revenues with $4.4 million in total pretax operating costs. The tax rate is 21 percent and the discount rate is 11 percent. The market value of the equipment over the life of the project is as follows: Year Market Value (millions) a. 1 $ 11.2 9.1 234 4.9 1.3 Assuming the company operates this project for four years, what is the NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) b-1. Compute…
Chadron Sports is considering adding a miniature golf course to its facility. The course would cost $138,000, would be depreciated on a straight-line basis over its five-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $72,000 a year with $24,000 of that amount being variable cost. The fixed cost would be $11,600. In addition, the firm anticipates an additional $14,000 in revenue from its existing facilities if the golf course is added. The project will require $7,000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 12 percent and a tax rate of 34 percent? O $14,438.78 $12,708.48 O $11,757.49 O $10,631.16 O $14,900.41
One of two methods will produce solar panels for electric power generation. Method 1 will have an initial cost of $550,000, an annual operating cost of $160,000 per year, and a $125,000 salvage value after its three-year life. Method 2 will cost $830,000 with an annual operating cost of $120,000, and a $240,000 salvage value after its five-year life. The company has asked you to determine which method is economically better, but it wants the analysis done over a three-year planning period. The salvage value of Method 2 will be 35% higher after 3 years than it is after 5 years. If the company’s MARR is 10% per year, which method should the company select?
The ABC Ltd is analysing the costs and benefits of setting up an extra fast-food outlet in Adelaide. The predicted costs and income flows are provided below: $2 million site acquisition and development costs. The capital depreciation expense is $50,000 per year. Investment in plant and equipment of $600,000. The plant and equipment have an estimated useful life of 5 years and the residual value would be zero. The plant and equipment will be depreciated on a straight-line basis for tax purposes. The forecasted sales in year 1 is $600,000 and $800,000 per year thereafter. Labour and material costs are equivalent to 50 per cent of incremental sales. The policy (objective) is to sell the outlet at the end of year 3. The estimated selling price is $3.5 million. Sales in a similar outlet of ABC Ltd will decline by $80,000 per year due to loss of customers and experienced staff to the new venture. Other operating costs are about $150,000 per year (fixed) The net working capital requirement at…
You are considering two different methods of constructing a new warehouse. The first method uses prefabricated building segments, would have an initial cost of $4.8 million, would have annual maintenance costs of $100,000 and would last for 25 years. The second alternative would employ a new carbon fibre panel technology, would have an initial cost of $6 million would have maintenance costs of $525,000 every ten years and is expected to last 40 years. Both buildings are in CCA class 1 (CCA rate of 4%). The salvage value for each would be 25% of initial cost. The firm uses a 15% cost of capital and it has a 38% tax rate. Calculate the NPV for each machine using the six step approach (nearest dollar without dollar sign ($) or comma eg 15000) Negative cash flow is -15000): What is the NPV for Alternative A? What is the NPV for Alternative B? What is the EAC for Alternative A? What is the EAC for Alternative B?
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Calculating EAC You are evaluating two different silicon wafer milling machines. The Techron I costs $265,000, has a 3-year life, and has pretax operating costs of $41,000 per year. The Techron II costs $330,000, has a 5-year life, and has pretax operating costs of $52,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $25,000. If your tax rate is 21 percent and your discount rate is 9 percent, compute the EAC for both machines. Which do you prefer? Why?
Consider a project with a 3-year life and no salvage value. The initial cost to set up the project is $100,000. This amount is to be linearly depreciated to zero over the life of the project. The price per unit is $90, variable costs are $72 per unit and fixed costs are $10,000 per year. The project has a required return of 12%. Ignore taxes. 1. How many units must be sold for the project to achieve accounting break-even? 2. How many units must be sold for the project to achieve cash break-even? 3. How many units must be sold for the project to achieve financial break-even? 4. What is the degree of operating leverage at the financial break-even?
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Use the following base case information to evaluate the project: PT Kolam Makara has a project costs $900,000, has a five-year life, and has a salvage value of $130,000. Depreciation is straight-line to zero. The required return is 14% and tax rate is 34%. Sales are projected at 2350 units per year. Price per unit is $400. Variable cost per unit is $200 and fixed costs are $150,000 per year. It is known that the depreciation expense is $180,000 per year. The engineering department estimates you will need an initial net working capital investment of $50,000. What is the sensitivity of OCF to changes in the variable cost figure at base case?

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