Commercial Hydronics Incorporation is considering an asset replacement project of replacing a control device. This old control device has been fully depreciated but can be sold for $5,000. The new control device, which is more automated, will cost $22,000. The new devices installation and shipping costs will total $12,000. The new device will be depreciated on a straight-line basis over its 2-year economic life to an estimated salvage value of $0. The actual salvage value of this device at the end of 2-year period (That is, the market value of the device at the end of 2-year period) is estimated to be $3,000. If the replacement project is accepted, Commercial Hydronics will require an initial working capital investment of $3,000 (that is, adding $3,000 initially to its net working capital). During the 1st year of operations, Commercial Hydronics expects its annual revenue to increase from $65,000 to $85,000. After the 1st year, revenues from the replacement are expected to increase at a rate of $2,200 a year for the remainder of the project life. Commercial Hydronics' incremental operating costs associated with the replacement project are expected to decrease from $20,000 to $12,000 during the 1st year and increase at a rate of $2500 for the remainder of the project life. Commercial Hydronics expects that it will have to add about $2,000 to its net working capital in year 1, and nothing in year 2. At the end of the project, the total accumulated net working capital required by the project will be recovered. Commercial Hydronics has a marginal tax rate of 35%.

What is the initial net investment for Commercial Hydronics to undertake this replacement project?

Question options:

$34,000

$32,000

$33,750

$32,400

What is the net operating cash flow at the end of year 1?

Question options:

$25,387

$21,475

$32,145

$22,150

What is the net operating cash flow at the end of year 2?

Question options:

$31,785

$30,905

$30,230

$35,210

Using the profitability index, which of the following mutually exclusive projects should be accepted?

Project A: NPV = $6,000; NINV = $50,000

Project B: NPV = $10,000; NINV = $120,000

Project C: NPV = $8,000; NINV = $80,000

Question options:

All projects should be accepted.

B

C

A

If there is no capital rationing problem, which of the following mutually exclusive projects should be accepted?

Project A: NPV = $8,000; NINV = $55,000

Project B: NPV = $11,000; NINV = $110,500

Question options:

Neither A nor B

A

B

Both A and B

D&D, Inc., plans to build a new toll way. The cost (NINV) of the project is expected to be $2.1 billion. Net cash inflows are expected to equal $351 million per year. How many years must the firm generate this cash inflow stream for investors to earn their required 16 percent rate of return?

Question options:

Around 19 years

Around 21 years

Around 9 years

Around 15 years