PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 6, Problem 11PS
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Kinky Copies may buy a high-volume copier. The machine costs $130,000 and this cost can be fully depreciated immediately. Kinky
anticipates that the machine actually can be sold in 5 years for $30,000. The machine will save $22,000 a year in labor costs as an
after-tax reduction, but will require an increase in working capital, mainly paper supplies, of $11,000. The firm's marginal tax rate is 21%,
and the discount rate is 6%. (Assume the net working capital will be recovered at the end of Year 5.)
What is the NPV of this project? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations.
Round your answer to 2 decimal places)
Chocoholics Anonymous wants to modernize its production machinery. The company's
sales are $9.22 million per year, and the choice of machine won't impact that amount.
The required return is 10 percent and the tax rate is 35 percent. Both machines will be
depreciated on a straight-line basis.
Machine Amaretto costs $1,950,000 and will last for 5 years. Variable costs are 39
percent of sales, and fixed costs are $131,000 per year.
Machine Baileys costs $4,610,000 and will last for 7 years. Variable costs for this
machine are 31 percent of sales and fixed costs are $103,000 per year.
Required:
(a)If the company plans to replace the machine when it wears out on a perpetual basis,
what is the EAC for machine Amaretto? (Do not round your intermediate
calculations.)
HINT: In EAC problems you first need to find the NPV. Using this NPV you can then
calculate the annuity (annual cost) that has the same present value/cost. The lecture
videos include a detailed example of this calculation.…
15. Project NPV (S6.3) A widget manufacturer currently produces 200,000 units a year. It buys widget lids from an Page 176
outside supplier at a price of $2 a lid. The plant manager believes that it would be cheaper to make these lids rather than buy
them. Direct production costs are estimated to be only $1.50 a lid. The necessary machinery would cost $150,000 and would
last 10 years. This investment could be written off immediately for tax purposes. The plant manager estimates that the
operation would require additional working capital of $30,000 but argues that this sum can be ignored since it is recoverable
at the end of the 10 years. If the company pays tax at a rate of 21% and the opportunity cost of capital is 15%, would you
support the plant manager's proposal? State clearly any additional assumptions that you need to make.
Chapter 6 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 6 - Cash flows Which of the following should be...Ch. 6 - Cash flows Reliable Electric, a major Ruritanian...Ch. 6 - Prob. 3PSCh. 6 - Prob. 4PSCh. 6 - Real and nominal flows Mr. Art Deco will be paid...Ch. 6 - Real and nominal flows Restate the net cash flows...Ch. 6 - Real and nominal flows Guandong Machinery is...Ch. 6 - Working capital Each of the following statements...Ch. 6 - Prob. 9PSCh. 6 - Project NPV Better Mousetraps research...
Ch. 6 - Project NPV A widget manufacturer currently...Ch. 6 - Project NPV Marsha Jones has bought a used...Ch. 6 - Project NPV United Pigpen is considering a...Ch. 6 - Project NPV Imperial Motors is considering...Ch. 6 - Project NPV and IRR A project requires an initial...Ch. 6 - Taxes and project NPV In the International Mulch...Ch. 6 - Depreciation and project NPV Suppose that Sudbury...Ch. 6 - Depreciation and project NPV Ms. T. Potts, the...Ch. 6 - Prob. 20PSCh. 6 - Prob. 21PSCh. 6 - Prob. 22PSCh. 6 - Equivalent annual cash flow Look at Problem 22...Ch. 6 - Equivalent annual cash flow Deutsche Transport can...Ch. 6 - Prob. 25PSCh. 6 - Mutually exclusive investments and project lives...Ch. 6 - Mutually exclusive investments and project lives...Ch. 6 - Mutually exclusive investments and project lives....Ch. 6 - Mutually exclusive investments and project lives...Ch. 6 - Mutually exclusive investments and project lives...Ch. 6 - Replacement decisions Machine C was purchased five...Ch. 6 - Replacement decisions Hayden Inc. has a number of...Ch. 6 - Replacement decisions. You are operating an old...Ch. 6 - Replacement decisions. A forklift will last for...Ch. 6 - The cost of excess capacity The presidents...Ch. 6 - Effective tax rates One measure of the effective...Ch. 6 - Equivalent annual costs We warned that equivalent...
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