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1. The owner of a bicycle repair shop forecasts revenues of $232,000 a year. Variable costs will be $68,000, and rental costs for the shop are $48,000 a year. Depreciation on the repair tools will be $28,000. Prepare an income statement for the shop based on these estimates. The tax rate is 35%. INCOME STATEMENT 0 $0 2. Johnny's Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $47,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $11,750. The grill will have no effect on revenues but will save Johnny's $23,500 in energy expenses per year. The tax rate is 40%. Use the MACRS depreciation schedule. a. What are the operating cash flows in each year? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Year Operating Cash Flows 1 2 3 b. What are the total cash flows in each year? (Do not round intermediate calculations. Round your answers to 2 decimal places. Time Total Cash Flows 0 1 2 3 c. If the discount rate is 11%, should the grill be purchased? Yes No 3. PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $75 million on equipment with an assumed life of 5 years and an assumed salvage value of $10 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $80 million. A new modem pool can be installed today for $180 million. This will have a 3-year life and will be depreciated to zero using straight-line depreciation. The new equipment will enable the firm to increase sales by $36 million per year and decrease operating costs by $18 million per year. At the end of 3 years, the new equipment will be worthless. Assume the firm's tax rate is 35% and the discount rate for projects of this sort is 10%. a. What is the net cash flow at time 0 if the old equipment is replaced? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Net cash flow million b. What are the incremental cash flows in years 1, 2, and 3? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Incremental cash flow million per year c. What are the NPV and IRR of the replacement project? (Do not round intermediate calculations. Enter the NPV in millions rounded to 2 decimal places. Enter the IRR as a percent rounded to 2 decimal places.) NPV million IRR % 4. revenues generated by a new fad product are forecast as follows: Year Revenues 1 $60,000 2 30,000 3 20,000 4 10,000 Thereafter0 Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 10% of revenues in the following year. The product requires an immediate investment of $54,000 in plant and equipment. a. What is the initial investment in the product? Remember working capital. Initial investment b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm's tax rate is 20%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. (Do not round intermediate calculations.) Year Cash Flow 1 2 3 4 c. If the opportunity cost of capital is 10%, what is the project's NPV? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV d. What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) IRR % 5. Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.3 million. The equipment will be depreciated straight line over 6 years to a value of zero, but in fact it can be sold after 6 years for $536,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year's forecast sales. The firm estimates production costs equal to $1.10 per trap and believes that the traps can be sold for $5 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm's tax bracket is 35%, and the required rate of return on the project is 10%. Use the MACRS depreciation schedule. Year: 01 2 3 4 5 6 Thereafter Sales (millions of traps)00.5 0. 0.8 0.8 0.6 0.5 0 7 a. What is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places.) NPV million b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule? (Do not round intermediate calculations. Enter your answer in whole dollars not in millions.) The NPV increases by 6. The efficiency gains resulting from a just-in-time inventory management system will allow a firm to reduce its level of inventories permanently by $493,000. What is the most the firm should be willing to pay for installing the system? Firm should willing to pay 7. Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.3 million. The equipment will be depreciated straight - line over 6 years to a value of zero, but, in fact, it can be sold after 6 years for $519,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year's forecast sales. The firm estimates production costs equal to $1.20 per trap and believes that the traps can be sold for $5 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm's tax bracket is 35%, and the required rate of return on the project is 10%. Use the MACRS depreciation schedule. Year: 0 1 2 3 4 5 6 Thereafter Sales (millions of traps)0 0.5 0.6 0.7 0.7 0.5 0.2 0 Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. By how much will this increase project NPV? (Enter your answer in millions rounded to 4 decimal places.) Change in NPV million