Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Textbook Question
Chapter 8, Problem 12P
A bicycle manufacturer currently produces 300,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.50 per chain. The necessary machinery would cost $250,000 and would be obsolete after 10 years. This investment could be
If the company pays tax at a rate of 35% and the
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A bicycle manufacturer currently produces 360,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2.10 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.50 per chain. The necessary machinery would cost $268,000 and would be obsolete after ten years. This investment could be depreciated to zero for tax purposes using a ten-year straight-line depreciation schedule. The plant manager estimates that the operation would require $56,000 of inventory and other working capital upfront (year 0), but argues that this sum can be ignored since it is recoverable at the end of the ten years. Expected proceeds from scrapping the machinery after ten years are $20,100.If the company pays tax at a rate of 20% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the…
A bicycle manufacturer currently produces 233,000 units a year and expects output levels to remain steady in the
future. It buys chains from an outside supplier at a price of $1.90 a chain. The plant manager believes that it would be
cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.40
per chain. The necessary machinery would cost $224,000 and would be obsolete after ten years. This investment
could be depreciated to zero for tax purposes using a ten-year straight-line depreciation schedule. The plant manager
estimates that the operation would require $58,000 of inventory and other working capital upfront (year 0), but argues
that this sum can be ignored since it is recoverable at the end of the ten years. Expected proceeds from scrapping the
machinery after ten years are $16,800.
If the company pays tax at a rate of 20% and the opportunity cost of capital is 15%, what is the net present value of
the decision to produce the…
A bicycle manufacturer currently produces 282,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $1.80 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.60 per chain. The necessary machinery would cost $225,000 and would be obsolete after ten years. This investment could be depreciated to zero for tax purposes using a ten-year straight-line depreciation schedule. The plant manager estimates that the operation would require $32,000 of inventory and other working capital upfront (year 0), but argues that this sum can be ignored since it is recoverable at the end of the ten years. Expected proceeds from scrapping the machinery after ten years are $16,875.
If the company pays tax at a rate of 20% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the…
Chapter 8 Solutions
Corporate Finance
Ch. 8.1 - How do we forecast unlevered net income?Ch. 8.1 - Prob. 2CCCh. 8.1 - Prob. 3CCCh. 8.2 - Prob. 1CCCh. 8.2 - What is the depreciation tax shield?Ch. 8.3 - Prob. 1CCCh. 8.3 - Prob. 2CCCh. 8.4 - Prob. 1CCCh. 8.4 - What is the continuation or terminal value of a...Ch. 8.5 - Prob. 1CC
Ch. 8.5 - How does scenario analysis differ from sensitivity...Ch. 8 - Pisa Pizza, a seller of frozen pizza is...Ch. 8 - Kokomochi is considering the launch of an...Ch. 8 - Home Builder Supply, a retailer in the home...Ch. 8 - Hyperion, Inc. currently sells its latest...Ch. 8 - Prob. 5PCh. 8 - Prob. 6PCh. 8 - Castle View Games would like to invest in a...Ch. 8 - Prob. 9PCh. 8 - Prob. 10PCh. 8 - Prob. 11PCh. 8 - A bicycle manufacturer currently produces 300,000...Ch. 8 - Prob. 13PCh. 8 - Prob. 14PCh. 8 - Prob. 15PCh. 8 - Prob. 16PCh. 8 - Prob. 17PCh. 8 - Prob. 18PCh. 8 - Prob. 20PCh. 8 - Prob. 21P
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