Question
1.Five years ago, a pharmaceutical company bought a machine that produces pain-reliever medicine at a cost of $3 million. The machine has been depreciated over
1.Five years ago, a pharmaceutical company bought a machine that produces pain-reliever medicine at a cost of $3 million. The machine has been depreciated over the past five years, and the current book value is $1.100,000. The company decides to sell the machine now at its market price of $1.4 million. The marginal tax rate is 30 percent. What are the relevant cash flows from the sale?
2.You are considering opening another restaurant in the food chain of Raising Canes. The new restaurant will have annual revenue of $1,100,000 and operating expenses of $600,000. The annual depreciation and amortization for the assets used in the restaurant will equal $70,000. An annual capital expenditure of $20,000 will be required to offset wear-and-tear on the assets used in the restaurant, but no additions to working capital will be required. The marginal tax rate will be 40 percent. Calculate the incremental annual free cash flow for the project.
3.Little Rhody Manufacturing needs to purchase a new central air-conditioning system for a plant. There are two choices. The first system costs $70,000 and is expected to last 6 years, and the second system costs $102,000 and is expected to last 9 years. Assume that the opportunity cost of capital is 12 percent. Which air-conditioning system should you purchase
4.High-End Fashions, Inc., bought a production line of ankle-length skirts last year at a cost of $500,000. This year, however, miniskirts are hot in the market and ankle-length skirts are completely out of fashion. High-End has the option to rebuild the production line and use it to produce miniskirts with a cost of $300,000 and expected revenue of $700,000. How should the company treat the cost of $500,000 of the old production line in evaluating the rebuilding plan?
5.You are providing financial advice to a shrimp farmer who will be harvesting his last crop of farm-raised shrimp. His current shrimp crop is very young and will, therefore, grow and become more valuable as their weight increases. Describe how you would determine the appropriate time to harvest the entire crop of shrimp.
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