1) Premium Pie Company needs to purchase a new baking oven to replace an older oven that requires too much energy to run. The industrial size oven will cost $1,200,000. The oven will be depreciated on a straight-line basis over its six-year useful life. The old oven cost the company $800,000 just four years ago. The old oven is being depreciated on a straight-line basis over its expected ten-year useful life. (That is, the old oven is expected to last six more years if it is not replaced now.) Due to changes in fuel costs, the old oven may only be sold today for $100,000. The new oven will allow the company to expand, increasing sales by $300,000 per year. Expenses will also decrease by $50,000 per year due to the more energy efficient design of the new oven. Premium Pie Company is in the 40% marginal tax bracket and has a required rate of return of 10%.

a. Calculate the net present value and internal rate of return of replacing the existing machine

b. Explain the impact on NPV of the following:

i. Required rate of return increases

ii. Operating costs of new machine are increased

iii. Existing machine sold for less

2) Agri-Industries purchased some agricultural land at the edge of a large metropolitan area for $250,000 five years ago. In order to have the land classified as agricultural for property tax purposes, the company has been leasing the property to neighboring farmers. The before-tax return from leasing the property is $12,000 per year. This company's corporate tax rate is 35 percent. If the company sells the land for $400,000 today, what is the internal rate of return on this investment?

3) Calculate the internal rate of return on the following projects:

a. Initial outlay of $60,500 with an after-tax cash flow of $11,897 per year for eight years.

b. Initial outlay of $647,000 with an after-tax cash flow of $118,000 per year for ten years.

c. Initial outlay of $25,400 with an after-tax cash flow $11,788 per year for three years.

4) Kelly Corporation is considering an investment proposal that requires an initial investment of $150,000 in equipment. Fully depreciated existing equipment may be disposed of for $40,000 pre-tax. The proposed project will have a five-year life, and is expected to produce additional revenue of $65,000 per year. Expenses other than depreciation will be $15,000 per year. The new equipment will be depreciated to zero over the five-year useful life, but it is expected to actually be sold for $20,000. Kelly has a 35% tax rate.

a. What is the net initial outlay for the proposed project?

b. What is the operating cash flow for years 1-4?

c. What is the total cash flow at the end of year five (operating cash flow for year 5 plus terminal cash flow)?

5) LEE Corporation intends to purchase equipment for $1,500,000. The equipment has a 5-year useful life and will be depreciated on a straight-line basis. Addition of the equipment requires additional working capital of $20,000. The $20,000 is expected to be recaptured at the end of the project. LEE's marginal tax rate is 40%. Use of the equipment is expected to change the company's reported EBIT by $600,000 in year one, $700,000 in year two, $550,000 in year three, $200,000 in year four, and $100,000 in year five. Due to changing market conditions, the equipment did have a salvage value of $100,000 at the end of year five.

a. Calculate the initial outlay and the incremental free cash flows over the life of the project.

b. If the risk-adjusted discount rate for this project is 20%, calculate the project's net present value and internal rate of return and comment on the acceptability of the project.