Problem 7-25 Scenario AnalysisYou are the financial analyst for a tennis racket manufacturer. The company isconsidering using a graphitelike material in its tennis rackets. The company hasestimated the information in the following table about the market for a racket with thenew material. The company expects to sell the racket for 5 years. The equipmentrequired for the project will be depreciated on a straight-line basis and has no salvagevalue. The required return for projects of this type is 14 percent and the company has a22 percent tax rate.Market sizeMarket shareSelling priceVariable costs perunitFixed costs per yearInitial investmentPessimistic127,000PessimisticExpectedOptimistic18%$ 146$96$ 968,000$ 1,620,000Expected137,00022%$ 151$92$ 913,000$ 1,470,000Optimistic149,00024%$ 155$89$ 883,000$ 1,450,000Calculate the NPV for each case for this project. Assume a negative taxable incomegenerates a tax credit. (A negative amount should be indicated by a minus sign. Donot round intermediate calculations and round your answers to 2 decimal places, e.g.,32.16.)

Net present value refers to the method of capital budgeting used for evaluating the viability of the…

Answered: You are the financial analyst for a…

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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Caine Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $193,900 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $30,600. Management also believes that the new bottling machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. Assume a discount rate of 7%. Click here to view the factor table. Calculate the net present value. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round present value answer to 0 decimal places, eg. 125.) Net present value $ $ How much would the reduction in downtime have to be worth in order for the project to be acceptable? (Round answer to O decimal places, e.g. 125.) 11178…
Penny and Daughter’s construction business is considering purchasing a new Bobcat. The equipment will cost $230,000 and is expected to last 14 years. The Bobcat has a salvage vale of $16,000. Calculate the depreciation AND book value for each year. You can create one table for a-d or you can create different tables for each. This problem will need to be done in excel. (30 points)a. Use straight-line depreciation. (5 points)b. Use declining-balance depreciation with a depreciation rate that ensures the book value equals the salvage vale in the last year of the life of the equipment. c. Use double declining balance depreciation. d. Use MACRS depreciation where the Bobcat is considered a 10 year property. e. Graph the Book values of each methods on a single graph. The graph should have points at each year for each BV and a line of each method. You will have 4 lines on your graph. You should include year 0 on your graph so that all four lines start at the same point. Each method should be…
You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphitelike material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the racket for 5 years. The equipment required for the project will be depreciated on a straight-line basis and has no salvage value. The required return for projects of this type is 14 percent and the company has a 24 percent tax rate. Market size Market share Selling price Variable costs per unit Fixed costs per year Initial investment Pessimistic Expected 124,000 Pessimistic Expected Optimistic $ $ $ $ $ 18% 152 99 $ 134,000 22% 157 95 $971,000 $916,000 $1,635,000 $1,485,000 -482,252.94 x 1,269,299.88 X 2,753,603.41 Optimistic Answer is complete but not entirely correct. Calculate the NPV for each case for this project. Assume a negative taxable income generates a tax credit. (A negative amount…
The management of Kunkel Company is considering the purchase of a $34,000 machine that would reduce operating costs by $9,000 per year. At the end of the machine's five-year useful life, it will have zero scrap value. The company's required rate of return is 12%. Use Excel or a financial calculator to solve. Required: 1. Determine the net present value of the investment in the machine. (Any cash outflows should be indicated by a minus sign. Round answers to the nearest dollar.) Net present value 2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? (Any cash outflows should be indicated by a minus sign.) Total Cash Item Cash Flow Years Flows Annual cost savings Initial investment 1 Net cash flow %24 24
An airline is considering a project of replacement and upgrading of machinery that would improve efficiency. The new machinery costs $500 today and is expected to last for 5 years with no salvage value. Straight line depreciation will be used. Project inflows connected with the new machinery will begin in one year and are expected to be $300 each year for 5 consecutive years and project outflows will also begin in one year and are expected to be $150.00 each year for 5 consecutive years. The corporate tax rate is 30% and the required rate of retum is 7% Calculate the project's net present value. Place your answer in dollars and cents. Do not include a dollar sign or comma in your answer. Work your analysis with at least four decimal places of accuracy YOU ARE NOT FINISHED. NOW GO ON TO THE SECOND PARTI PART 2. Given your estimate of the NPV, should you accept or reject the project? Type the word "accept" if you believe you should go ahead with the project of the word "reject" if you…
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