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essentials managerial finance

Questions and Answers of Essentials Managerial Finance

=+b. The asset is sold for $650,000.c. The asset is sold for $101,244.d. The asset is sold for $92,244.
=+LG 3 P11–10 Change in net working capital calculation MSF Manufacturing is considering the purchase of a new machine to improve its production efficiency. The company has total current assets of
=+a. Using the information given, calculate any change in net working capital that is expected to result from the proposed replacement plan.
=+b. Explain why a change in these current accounts would be relevant in determining the initial investment for the proposed capital expenditure.
=+c. Would the change in net working capital enter into any of the other cash flow components that make up the project’s relevant cash flows? Explain.
=+LG 3 LG 4 P11–11 Calculating initial investment Miller Dental Inc. is considering replacing its laser checking system, which was purchased 3 years ago at a cost of $568,000. The system can be
=+a. Calculate the book value of the existing laser checking system.
=+b. Calculate the after-tax proceeds of its sale for $253,000.
=+c. Calculate the initial investment associated with the replacement project.
=+P11–12 Initial investment: Basic calculation Sony Pacific Music Corporation is considering the purchase of a new sound board, used in recording studios to improve sound effects. The existing
=+LG 3 LG 4 P11–13 Initial investment at various sale prices Novartis International AG is considering replacing one labeling system with a new model. The old system was purchased 2 years ago for an
=+a. Novartis sells the old labeling system for CHf 400,000.b. Novartis sells the old labeling system for CHf 300,000.c. Novartis sells the old labeling system for CHf 200,000.d. Novartis sells the
=+LG 3 LG 4 P11–14 Calculating initial investment DuPree Coffee Roasters Inc. wishes to expand and modernize its facilities. The installed cost of a proposed computer-controlled automatic-feed
=+a. What is the book value of the existing roaster?
=+b. Calculate the after-tax proceeds of the sale of the existing roaster.
=+c. Calculate the change in net working capital using the figures in the following table.
=+d. Calculate the initial investment associated with the new roaster.
=+LG 5 P11–15 Depreciation Tasty Bakery Corporation is evaluating the acquisition of a baking machine that costs $72,000 and requires $3,000 in installation costs. If the corporation depreciates
=+P11–16 Operating cash inflows A partnership is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is$1.9 million plus $100,000 in
=+a. What incremental earnings before interest, taxes, depreciation, and amortization will result from the renewal?
=+b. What incremental net operating profits after taxes will result from the renewal?
=+c. What operating cash flows will result from the renewal?Personal Finance Problem
=+LG 5 P11–17 Operating cash flows Michele operates a local tourist agency. He has been using an Olivetti personal computer (PC) for several years and believes it is time to buy a new one. He would
=+LG 5 P11–18 Operating cash flows: Expense reduction Biophore Corporation, an Indian pharmaceutical company, is considering replacing a labeling machine in one of its factories. The replacement
=+P11–19 Operating cash flows Hoffmann-La Roche is considering replacing one permeability test equipment with a new model. The old equipment is fully depreciated and would last 3 more years. The
=+a. Calculate the operating cash flows associated with each equipment.
=+b. Calculate the operating cash flows resulting from the proposed equipment replacement.
=+c. Depict on a timeline the operating cash flows calculated in part b.
=+LG 5 P11–20 Operating cash inflows MSC Cruises provides cruise lines for tourist destinations all around the world. It is considering replacing 1 of its cruise ships with a new model.The existing
=+P11–21 Terminal cash flow: Various lives and sale prices Looner Industries is currently analyzing the purchase of a new machine that costs $160,000 and requires $20,000 in installation costs.
=+a. Calculate the terminal cash flow for a usable life of (1) 3 years, (2) 5 years, and(3) 7 years.
=+b. Discuss the effect of usable life on terminal cash flows, using your findings in part a.
=+c. Assuming a 5-year usable life, calculate the terminal cash flow if the machine were sold to net (1) $9,000 or (2) $170,000 (before taxes) at the end of 5 years.
=+d. Discuss the effect of sale price on terminal cash flow, using your findings in part c.
=+LG 6 P11–22 Terminal cash flow: Replacement decision Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a newer, more
=+LG 3 LG 4 P11–23 Net cash flows for a marketing campaign Barilla Group, a manufacturer of pasta and other similar food products, has maintained stable sales and profits over the last few years.
=+P11–24 Net cash flows: No terminal value Central Laundry is replacing an existing piece of machinery with a new model. The old machine was purchased 3 years ago for$50,000 and was being
=+a. Calculate the initial investment associated with replacement of the old machine by the new one.
=+b. Determine the operating cash flows associated with the proposed replacement.(Note: Be sure to consider the depreciation in year 6.)
=+c. Depict on a timeline the net cash flows found in parts a and b associated with the proposed replacement decision.)
=+d. How would your answers change if the new machine is eligible for 100% bonus depreciation?
=+LG 3 LG 4 P11–25 Integrative: Determining net cash flows Pirelli & C. S.p.A. is considering purchasing a new rubber extrusion line that produces rolling bands, flanks, and the other products
=+a. Calculate the initial investment associated with the replacement of the existing line by the new one.
=+b. Determine the operating cash flows associated with the proposed line replacement.
=+c. Determine the terminal cash flow expected at the end of year 5 from the proposed line replacement.
=+d. Depict on a timeline the incremental cash flows associated with the proposed line replacement decision.Personal Finance Problem
=+LG 3 LG 4 P11–26 Determining net cash flows for a new car Antonio and his wife Alessia are considering the purchase of a new car and have decided that estimating its cash flows will help them in
=+a. The initial investmentb. Operating cash flowc. Terminal cash flowd. Summary of annual cash flowe. Based on their disposable annual income, what advice would you give Antonio and Alessia
=+P11–27 Integrative: Determining net cash flows Refer to P11-25. Suppose that Pirelli is considering an alternative rubber extrusion line, which is less expensive (it costs€800,000 and does not
=+a. Calculate the initial investment associated with the alternative line.
=+b. Determine the incremental operating cash flows associated with the alternative line replacement.
=+c. Determine the terminal cash flow expected at the end of year 5 from the alternative line replacement.
=+d. Depict on a timeline the incremental cash flows associated with the alternative line replacement decision.
=+LG 1 LG 2 P11–28 Integrative: Complete investment decision Due to an increase in copper prices to MNT 7,744 per pound (MNT stands for Tughrik, the official currency of Mongolia), Tian Poh
=+a. Calculate the operating cash flows for the copper mine project.
=+b. Depict on a timeline the net cash flows for the copper mine project.
=+c. Calculate the internal rate of return (IRR) for the copper mine project.
=+d. Calculate the net present value (NPV) for the copper mine project.
=+e. Make a recommendation to accept or reject the copper mine project, and justify your answer.
=+P11–29 Integrative: Complete investment decision Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.2 million. This outlay would be
=+a. Determine the initial investment required by the new press.
=+b. Determine the operating cash flows attributable to the new press. (Note: Be sure to consider the depreciation in year 6.)
=+c. Determine the payback period.
=+d. Determine the net present value (NPV) and the internal rate of return (IRR)related to the proposed new press.e. Make a recommendation to accept or reject the new press, and justify your answer.
=+LG 1 LG 2 P11–30 Integrative: Investment decision Holliday Manufacturing is considering the replacement of an existing machine. The new machine costs $1,200,000 and requires installation costs
=+a. Develop the net cash flows needed to analyze the proposed replacement.
=+b. Determine the net present value (NPV) of the proposal.
=+c. Determine the internal rate of return (IRR) of the proposal.
=+d. Make a recommendation to accept or reject the replacement proposal, and justify your answer.
=+e. What is the highest cost of capital that the firm could have and still accept the proposal? Explain.
=+LG 2 P11–31 ETHICS PROBLEM Cash flow projections are a central component to the analysis of new investment ideas. In most firms, the person responsible for making these projections is not the
=+a. Create a spreadsheet to calculate the initial investment.
=+b. Create a spreadsheet to prepare a depreciation schedule for both the new and the old machine. Both machines are depreciated under MACRS, using a 5-year recovery period. Remember that the old
=+c. Create a spreadsheet to calculate the operating cash flows for Damon Corporation for both the new and the old machine.
=+d. Create a spreadsheet to calculate the terminal cash flow associated with the project.
=+e. Repeat all of the calculations above assuming that the new machine qualifies for 100% bonus depreciation.
=+9–10 What premise about share value underlies the constant-growth valuation (Gordon growth) model that we use to measure the cost of common stock equity, rs?
=+ST9–1 Individual financing costs and WACC Humble Manufacturing is interested in measuring its overall cost of capital. The firm is in the 21% tax bracket. The company’s financial analysts have
=+a. Calculate the individual cost of each source of financing. (Round to the nearest 0.1%.)
=+b. Calculate the firm’s weighted average cost of capital (WACC) using the weights shown in the following table, which are based on the firm’s target capital structure proportions. (Round to
=+c. In which, if any, of the investments shown in the following table do you recommend that the firm invest? Explain your answer. How much new financing is required?
=+LG 4 E9–2 People’s Consulting Group has been asked to consult on a potential preferred stock offering by Brave New World. This 9% preferred stock issue would be sold at its par value of $55 per
=+LG 5 E9–3 Belle Fashions supplies garments to high street retailers. They have been paying dividends steadily for 10 years. During that time, dividends have grown at a compound annual rate of
=+P9–1 Concept of cost of capital and WACC Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involved
=+a. An analyst evaluating the North facility expects that the project will be financed by debt that costs the firm 7%. What recommendation do you think this analyst will make regarding the
=+b. Another analyst assigned to study the South facility believes that funding for that project will come from the firm’s retained earnings at a cost of 16%. What recommendation do you expect
=+c. Explain why the decisions in parts a and b may not be in the best interests of the firm’s investors.
=+d. If the firm maintains a capital structure containing 40% debt and 60% equity, find its weighted average cost of capital (WACC) using the data in the table.
=+e. If both analysts had used the WACC calculated in partd, what recommendations would they have made regarding the North and South facilities?
=+f. Compare and contrast the analyst’s initial recommendations with your findings in parte. Which decision method seems more appropriate? Explain why.
=+P9–2 Cost of debt using both methods Currently, Jackson Real Estate Inc. can sell 10-year, $100-par-value bonds paying annual interest at a 6% coupon rate. Jackson can sell its bonds for $106.20
=+a. Find the net proceeds from sale of the bond, Nd.
=+b. Show the cash flow from the firm’s point of view over the maturity of the bond.
=+c. Calculate the before-tax and after-tax costs of debt.
=+d. Use the approximation formula to estimate the before-tax and after-tax costs of debt.
=+e. Compare the costs of debt calculated in parts c andd. Which approach do you prefer? Why?Personal Finance Problem
=+LG 3 P9–3 Before-tax cost of debt and after-tax cost of debt Jim Paige is opening his own restaurant, and he is taking out a 10-year mortgage. Jim will borrow $400,000 from a bank, and to repay
=+a. What is the before-tax interest rate (per year) on Jim’s loan?
=+b. What is the after-tax interest rate that Jim is paying?
=+LG 3 P9–4 Cost of debt using the approximation formula For each of the following $1,000-parvalue bonds, assuming annual interest payment and a 21% tax rate, calculate the after-tax cost to

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