Fin 325 - Ch. 9 Homework

Q1. Hat Inc. is thinking of investing in a new machine to produce baseball caps. The new machine will cost $1M and will last for 4 years. At the end of 4 years salvage value is estimated at $100k. Executives believe they will be able to generate $750k in sales next year. COGS are estimated to be 35% of sales. Fixed costs for the production are $150K. Sales are projected to grow by 15% each year from years 2-4. Net working capital requirements are as follows: $140K, $170K, $190K, $160K in years 1-4 respectively. Hat Inc. uses straight line depreciation, has a tax rate of 20%, and a required rate of return of 13%. Use Excel to find the NPV and IRR of investing in the new machine.

Q2.

XYZ company is considering building a new office building. XYZ already owns a plot of land worth $2M and has paid an architectural firm $300k for building designs. Construction cost for the building is $1M. Projected rent income from the building is $400k/year* and interest expense will be $300k/year. After three years XYZ expects to sell the building and land for $2.5M. If XYZ has a required rate of return of 10%, what is the NPV and IRR of building the office building?

*This can be used as a direct measure of OCF. No additional NWC is required for the project.