1.

Your small remodeling business has two work vehicles. One is a small passenger car used for job-site visits and for other general business purposes. The other is a heavy truck used to haul equipment. The car gets 25 miles per gallon (mpg). The truck gets 10 mpg. You want to improve gas mileage to save money, and you have enough money to upgrade one vehicle. The upgrade cost will be the same for both vehicles. An upgraded car will get 40 mpg; an upgraded truck will get 12.5 mpg. The cost of gasoline is $3.55 per gallon

Calculate the annual fuel savings in gallons for the truck and car assuming both vehicles are driven 10,500 miles per year.

2.

Consider a project to supply 105 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,950,000 five years ago; if the land were sold today, it would net you $2,150,000 aftertax. The land can be sold for $2,350,000 after taxes in five years. You will need to install $5.45 million in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the projects five-year life. The equipment can be sold for $550,000 at the end of the project. You will also need $650,000 in initial net working capital for the project, and an additional investment of $55,000 in every year thereafter. Your production costs are 0.55 cents per stamp, and you have fixed costs of $1,090,000 per year. If your tax rate is 30 percent and your required return on this project is 10 percent, what bid price should you submit on the contract?

3. Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $264,000, has a four-year life, and requires $81,000 in pretax annual operating costs. System B costs $372,000, has a six-year life, and requires $75,000 in pretax annual operating costs. Suppose LISC always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 34 percent and the discount rate is 8 percent.

Calculate the EAC for both conveyor belt systems

Your firm is contemplating the purchase of a new $600,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $64,000 at the end of that time. You will be able to reduce working capital by $79,000 (this is a one-time reduction). The tax rate is 30 percent and the required return on the project is 16 percent.

If the pretax cost savings are $204,000 per year, what is the NPV of this project?

If the pretax cost savings are $154,000 per year, what is the NPV of this project?

At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?