You 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 6 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 13 percent and the company has a23 percent tax rate.Market sizeMarket shareSelling priceVariable costs perunitFixed costs per yearInitial investmentPessimistic129,000PessimisticExpectedOptimistic19%$142$95$ 967,000$ 1,838,000Expected139,00023%$147$91$ 912,000$1,688,000Optimistic151,00025%$ 151$88$ 882,000$1,668,000Calculate 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.)

The net present value is the present value of all the future cash flows subtracted from the initial…

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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Vishnu
Alliance Manufacturing Company is considering the purchase of a new automated drill press to replace an older one. The machine now in operation has a book value of zero and a salvage value of zero. However, it is in good working condition with an expected life of 10 additional years. The new drill press is more efficient than the existing one and, if installed, will provide an estimated cost savings (in labor, materials, and maintenance) of $6,000 per year. The new machine costs $25,000 delivered and installed. It has an estimated useful life of 10 years and a salvage value of $1,000 at the end of this period. The firm’s cost of capital is 14 percent, and its marginal income tax rate is 40 percent. The firm uses the straight-line depreciation method. Complete the following table to compute the net present value (NPV) of the investment. (Hint: Remember that, in Year 10, Alliances also receives the salvage value of the machine.) Year Cash Flow PV Interest Factor at 14%…
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.
You are a financial analyst employed by the Arlo Construction Company. Arlo Construction is considering submitting a bid to construct a facility for a golf club and has asked you about the feasibility of constructing the facility. The investment in fixed assets necessary will require $318,000 and be depreciated straight-line to zero over the 6-year life of the project with no salvage value. Annual cash costs associated with the project are estimated to be $198,200. Arlo Construction has an effective tax rate of 35 percent. Suppose Arlo requires annual operating cash flows of $92,000.
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 rpachines, 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 0 decimal places, e.g. 125.)
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
You are considering a proposal to produce and market a new sluffing machine. The most likely outcomes for the project are as follows: Expected sales: 125,000 units per year Unit price: $240 Variable cost: $144 Fixed cost: $5,430,000 The project will last for 10 years and requires an initial Investment of $21.78 million, which will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 30%, and the required rate of return is 12% However, you recognize that some of these estimates are subject to error. In one scenario a sharp rise in the dollar could cause sales to fall 30% below expectations for the life of the project and, if that happens, the unit price would probably be only $230. The good news is that fixed costs could be as low as $3,620,000, and variable costs would decline in proportion to sales. a. What is project NPV If all variables are as expected? Note: Do not round Intermediate calculations. Enter your answer in thousands not in…
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…
Englewood Company has an opportunity to produce and sell a revolutionary new smoke detector for homes. To determine whether this would be a profitable venture, the company has gathered the following data on probable costs and market potential: a. New equipment would have to be acquired to produce the smoke detector. The equipment would cost $100,000 and be useable for 12 years. After 12 years, it would have a salvage value equal to 10% of the original cost. b. Production and sales of the smoke detector would require a working capital investment of $ 40,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released for use elsewhere after 12 years. c. An extensive marketing study projects sales in units over the next 12 years as follows: Year Sales in Units 1... 7,000 3..... ... 10,000 4 -12.. ..... 4,000 2.... d. The smoke detectors would sell for $45 each; variable costs for production, administration, and sales would be $25 per…
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 6 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 13 percent and the company has a 23 percent tax rate. Market size Market share Selling price Variable costs per unit Fixed costs per year Initial investment Pessimistic 113,000 19% $164 $ 106 $978,000 $ 1,968,000 Expected 123,000 23% $ 169 $ 102 $ 923,000 $1,818,000 Optimistic 135,000 25% $ 173 $ 99 $ 893,000 $ 1,798,000 Calculate the NPV for each case for this project. Assume a negative taxable income generates a tax credit. (A negative amount should be indicated by a minus sign. Do not round intermediate calculations…
Alliance Manufacturing Company is considering the purchase of a new automated drill press to replace an older one. The machine now in operation has a book value of zero and a salvage value of zero. However, it is in good working condition with an expected life of 10 additional years. The new drill press is more efficient than the existing one and, if installed, will provide an estimated cost savings (in labor, materials, and maintenance) of $6,000 per year. The new machine costs $25,000 delivered and installed. It has an estimated useful life of 10 years and a salvage value of $1,000 at the end of this period. The firm’s cost of capital is 14 percent, and its marginal income tax rate is 40 percent. The firm uses the straight-line depreciation method.a. What is the net cash flow in year 0 (i.e., initial outlay)?b. What are the net cash flows after taxes in each of the next 10 years?c. What is the NPV of the investment?d. Should Alliance replace its existing drill press?
Sarasota Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $450,000 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 $78,750. 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. Click here to view PV tables. How much would the reduction in downtime have to be worth in order for the project to be acceptable? Sarasota's discount rate is 10%. (Use the above table.) (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to O decimal places, e.g. 5,275.) Reduction in downtime would have to have a present value $

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