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 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 a24 percent tax rate.Market sizeMarket shareSelling priceVariable costs perunitFixed costs peryearInitial investmentPessimistic Expected124,000PessimisticExpectedOptimistic$$$$$18%15299 $134,00022%15795$971,000$916,000$1,635,000 $1,485,000-482,252.94 x1,269,299.88 X2,753,603.41OptimisticAnswer is complete but not entirely correct.Calculate the NPV for each case for this project. Assume a negative taxable incomegenerates a tax credit. (A negative amount should be indicated by a minus sign. Donot round intermediate calculations and round your answers to 2 decimal places, e.g.,32.16.)146,00024%16192$ 886,000$1,465,000

Net present value (NPV) is computed by deducting the discounted cash outflow from the sum of…

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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Weston Clothing Company is considering manufacturing a new style of shirt, whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other Weston's products and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.) Cost of capital Pre-tax cash flow reduction for other products (cannibalization) Investment cost (depreciable basis) Straight-line deprec. rate Sales revenues, each year for 3 years Annual operating costs (excl. deprec.) Tax rate O a. $7,550 b. $6,848 c. $7,190 d. $6,522 Oe. $6,196 10.0% $5,000 $80,000 33.333% $67,500 $25,000 25.0%
Coronado Skateboards is considering building a new plant. David Al-Saigh, the company's marketing manager, is an enthusiastic supporter of the new plant. Jennifer Miller, the company's chief financial officer, is not so sure that the plant is a good idea. Currently, the company purchases its skateboards from foreign manufacturers. The following figures were estimated for the construction of a new plant: Cost of plant Annual cash inflows Annual cash outflows Estimated useful life Salvage value Discount rate $6,360,000 $6,360,000 $5,883,000 15 years $1,060,000 David believes that these figures understate the true potential value of the plant. He suggests that by manufacturing its own skateboards the company will benefit from a "buy Canadian" patriotism. He also notes that the firm has had numerous quality problems with the skateboards manufactured by its suppliers. He suggests that the inconsistent quality has resulted in lost sales, increased warranty claims, and some costly lawsuits.…
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.
Applied Nanotech is thinking about introducing a new surface cleaning machine. The engineering department has come up with the estimate that developing the machine will take a $7.5 million initial investment. If unsuccessful, after the first year the project can be dismantled and will have an after tax salvage value of $3.5 million. If the risk-free rate is 4% and the volatility of the business is 40%, determine the value of the option to abandon. Determine whether the company should dismantle the project.
Arnold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by body builders. The project requires use of an existing warehouse, which the firm acquired three years ago for $3 million and which it currently rents out for $101,000. Rental rates are not expected to change going forward. In addition to using the warehouse, the project requires an upfront investment into machines and other equipment of $1.5 million. This investment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc. expects to terminate the project at the end of eight years and to sell the machines and equipment for $468,000. Finally, the project requires an initial investment into net working capital equal to 10 percent of predicted first-year sales. Subsequently, net working capital is 10 percent of the predicted sales over the following year. Sales of protein bars are expected to be $4.5 million in the first year and to stay…
Amold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by body builders. The project requires use of an existing warehouse, which the firm acquired three years ago for $1 million and which it currently rents out for $127,000. Rental rates are not expected to change going forward. In addition to using the warehouse, the project requires an upfront investment into machines and other equipment of $1.5 million. This investment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Amold Inc. expects to terminate the project at the end of eight years and to sell the machines and equipment for $446,000. Finally, the project requires an initial investment into net working capital equal to 10 percent of predicted first-year sales. Subsequently, net working capital is 10 percent of the predicted sales over the following year. Sales of protein bars are expected to be $4.6 million in the first year and to stay constant…
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Arnold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by body builders. The project requires use of an existing warehouse, which the firm acquired three years ago for $1 million and which it currently rents out for $116,000. Rental rates are not expected to change going forward. In addition to using the warehouse, the project requires an upfront investment into machines and other equipment of $1.3 million. This investment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc. expects to terminate the project at the end of eight years and to sell the machines and equipment for $581,000. Finally, the project requires an initial investment into net working capital equal to 10% of predicted first-year sales. Subsequently, net working capital is 10% of the predicted sales over the following year. Sales of protein bars are expected to be $4.5 million in the first year and to stay constant for eight…
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Blossom Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the Option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life. The following estimates were made of the cash flows. The company's cost of capital is 5%. Option A Option B Initial cost $183,000 $281,000 Annual cash inflows $70,000 $80,000 Annual cash outflows $28,000 $25,000 Cost to rebuild (end of year 4) $48,000 $0 Salvage value $0 $7,000 Estimated useful life 7 years 7 years
Vijay
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…

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