Your firm is contemplating the purchase of a new $535,000 computer-based order entry system.The system will be depreciated straight-line to zero over its five-year life. It will be worth $30,000 at the end of that time. You will save $165,000 before taxes per year in order processingcosts, and you will be able to reduce working capital by $60,000 (this is a one-time reduction).If the tax rate is 24 percent, what is the IRR for this project? (Do not round intermediatecalculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

IRR or Internal Rate of Return pertains to the discount rate that will yield a Net Present Value…

Answered: Your firm is contemplating the purchase…

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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Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $321,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,710,000. The cost of the machine will decline by $106,000 per year until it reaches $1,180,000, where it will remain. If your required return is 13 percent, calculate the NPV today. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV If your required return is 13 percent, calculate the NPV if you wait to purchase the machine until the indicated year. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Better Mousetrap's research laboratories just purchased a new executive jet for its president. The jet is currently underutilized, and management is considering allowing other officers to use it. This move would save $15,500 per year in real terms in airline bills. Offsetting this benefit is the notion that the jet will have to be replaced a year sooner than originally planned. If the jet cost $1,050,000 and was originally expected to last eight years, should management allow other officers to use the jet? The real opportunity cost of is 15%. Yes, because the present value of saving, $64,486.51, is greater than the present value of cost, $57.966.48. No, because the present value of saving. $69.553.48 is less than the present value of cost, $87,038.26. No, because the present value of saving, $64.486.51, is less than the present value of cost, $76,492.59. No, because the present value of saving, $69,553.48, is Igreater than the present value of cost, $65,732.14.
Your firm is contemplating the purchase of a new $595,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $63,000 at the end of that time. You will save $225,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $78,000 (this is a one-time reduction). If the tax rate is 23 percent, what is the IRR for this project? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. IRR
Bilk.com, an online retailing company, proposes to spend $50 million on servers and other computer equipment for managing its Web site and processing orders. The company will depreciate the equipment over five years to zero. However, the company actually expects that it will be able to sell the equipment for $25 million at the end of five years. This equipment is expected to generate $30 million in sales in the first year and $21 million in cash operating costs in the first year. Both revenue and cash operating costs are expected to grow at an annual rate of 3% throughout the useful life of the equipment. There is no initial working capital requirement. However, the company will need to have a working capital balance at the end of each year equal to 20% of that year’s sales. The working capital can be fully recovered at the end of the project’s life. Bilk.com’s tax rate is 40%, and the cost of capital for this project is 8%. Calculate the cash flows in year 1. a. $2,825,000…
You are considering adding a new item to your company’s line of products. The machine required to manufacture the item costs $200000, and it depreciates straight-line over 4 years. The new item would require a $30000 increase in inventory and a $15000 increase in accounts payable. You plan to market the items for four years and then sell the machine for $40000. You expect to sell 2000 items per year at a price of $300. You expect manufacturing costs to be $220 per item and the fixed cost to be $3,000 per year. If the tax rate is 30% and your weighted average cost of capital is 12% per year, what is the net present value of selling the new item? ) $159,744 2) $73,903 3) $191,692 4) -$159,744 5) -$191,692
Your firm is contemplating the purchase of a new $410,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. You will save $125,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $35,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. If the tax rate is 21 percent, what is the IRR for this project?
Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $435,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $2.8 million. The cost of the machine will decline by $215,000 per year until it reaches $2.155 million, where it will remain. If your required return is 9 percent, calculate the NPV today. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) If your required return is 9 percent, calculate the NPV if you wait to purchase the machine until the indicated year. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Should you purchase…
Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $321,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,710,000. The cost of the machine will decline by $106,000 per year until it reaches $1,180,000, where it will remain. If your required return is 13 percent, calculate the NPV today. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $ 31,824.16 If your required return is 13 percent, calculate the NPV for the following years. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. A negative answer should be indicated by a minus sign.) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 NPV
The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $70,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net operating working capital of $6,000. The computer would increase the firm's before-tax revenues by $30,000 per year but would also increase operating costs by $19,000 per year. The computer is expected to be used for 3 years and then be sold for $25,000. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 14 percent.What is the net cash flow at t = 0? Cash outflow should be in negative number, e.g., -33,000, and do not include the $ sign.
After spending $9,600 on client-development, you have just been offered a big production contract by a new client. The contract will add $196,000 to your revenues for each of the next five years and it will cost you $96,000 per year to make the additional product. You will have to use some existing equipment and buy new equipment as well. The existing equipment is fully depreciated, but could be sold for $45,000 now. If you use it in the project, it will be worthless at the end of the project. You will buy new equipment valued at $29,000 and use the 5-year MACRS schedule to depreciate it. It will be worthless at the end of the project. Your current production manager earns $79,000 per year. Since she is busy with ongoing projects, you are planning to hire an assistant at$38,000 per year to help with the expansion. You will have to immediately increase your inventory from $20,000 to $30,000. It will return to $20,000 at the end of the project is 21% and your discount rate is 14.7%. What…
Your firm is contemplating the purchase of a new $595,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $63,000 at the end of that time. You will save $225,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $78,000 (this is a one-time reduction). If the tax rate is 23 percent, what is the IRR for this project? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. IRR Answer is complete but not entirely correct. 8.96
The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $40,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net operating working capital of $2,000. The computer would increase the firm's before-tax revenues by $26,000 per year but would also increase operating costs by $18,000 per year. The computer is expected to be used for 3 years and then be sold for $25,000. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 14 percent.What is the operating cash flow in Year 2? Round it to a whole dollar, and do not include the $ sign. Year MACRS Percent 1 0.33 2 0.45 3 0.15 4 0.07

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