how to do question 8. what to do with tax depreciation

Assignment 1 20 1 point 1. If the projects you are considering today have unequal lives, then both NPV and IRR will always rank them differently. True False 1 point 2. If two projects have equal lives, then the NPV criterion for making decisions needs to be modified by Neither of the other two approaches Dividing NPVs of the two projects by the number of years Converting the NPV into Equal Annual Amounts based on their lives 1 point 3. One should always choose a machine that has the higher purchase price because it is almost surely likely to last much longer. False True 1 point 4. Profitable projects that last longer tend to require more upfront costs and therefore are always likely to be of lower value. True False 1 point 5. You are in the market for purchasing a new machine. Machine A costs $10 million dollars and its maintenance costs are $150,000 a year and it lasts 10 years. Machine B costs $12.50 million dollars and has a maintenance cost of $100,000 per year and lasts 12 years. Assume all maintenance costs occur at year-end while you have to pay upfront for machines. Suppose the discount rate is 4.50% and there are no taxes. You should buy Machine B Machine A 1 point 6. Questions 6-10 are related to the same Mega problem. Your company is evaluating two different network systems for its main factory: Option A will cost $4.00 million and $300,000 annually to operate, and has a life of four years. Option B will cost $6.80 million and $200,000 per year to operate, and has a life of seven years. Assume all maintenance costs occur at year-end while you have to pay upfront for machines. Suppose there are no taxes and the appropriate discount rate is 9.00%, which system will you choose? Option B Option A 1 point 7. Questions 6-10 are related to the same Mega problem. Your company is evaluating two different network systems for its main factory: Option A will cost $4.00 million and $300,000 annually to operate, and has a life of four years. Option B will cost $6.80 million and $200,000 per year to operate, and has a life of seven years. Assume all maintenance costs occur at year-end while you have to pay upfront for machines. Suppose there are no taxes and the appropriate discount rate is 9.00%, what will it cost to choose the option you chose above (in Q.6) and replace the system indefinitely? (Enter an amount rounded off to the nearest whole number but without the $ sign.) 1 point 8. Questions 6-10 are related to the same Mega problem. Your company is evaluating two different network systems for its main factory: Option A will cost $4.00 million and $300,000 annually to operate, and has a life of four years. Option B will cost $6.80 million and $200,000 per year to operate, and has a life of seven years. Suppose the tax rate is 34% and straight-line depreciation is to be used, and both systems will be depreciated fully over their respective lives. The systems will have no salvage values at the end of their respective lives. Assume all maintenance costs occur at year-end while you have to pay upfront for machines. Suppose your company is very profitable and has a discount rate of 9%. Which system will you now choose? Option A Option B 1 point 9. Questions 6-10 are related to the same Mega problem. Your company is evaluating two different network systems for its main factory: Option A will cost $4.00 million and $300,000 annually to operate, and has a life of four years. Option B will cost $6.80 million and $200,000 per year to operate, and has a life of seven years. Suppose the tax rate is 34% and straight-line depreciation is to be used, and both systems will be depreciated fully over their respective lives. The systems will have no salvage values at the end of their respective lives. Assume all maintenance costs occur at year-end while you have to pay upfront for machines. Suppose your company is very profitable and has a discount rate of 9%. What will it cost to choose the option you chose above (in Q.8) and replace the system indefinitely? (Enter an amount rounded off to the nearest whole number but without the $ sign.) 1 point 10. Questions 6-10 are related to the same Mega problem. Your company is evaluating two different network systems for its main factory: Option A will cost $4.00 million and $300,000 annually to operate, and has a life of four years. Option B will cost $6.80 million and $200,000 per year to operate, and has a life of seven years. Suppose the tax rate is 34% and straight-line depreciation is to be used, and both systems will be depreciated fully over their respective lives. The systems will have no salvage values at the end of their respective lives. Assume all maintenance costs occur at year-end while you have to pay upfront for machines. Suppose your company is very profitable and has a discount rate of 9%. Your boss is very keen on the system you did NOT choose. To make you indifferent between purchasing the two systems you will have to bargain to lower the purchase price of the system your boss prefers by approximately: $250,000 $500,000 $150,000 $400,000 1 point 11. Questions 11-15 are related to the same Mega problem. XYZ, Inc. is considering introducing a new product to add to its line up of existing products. The introduction of the new product will require the company to buy a new fleet of trucks used to sell the products at a total cost of $1,150,000 at the end of three as opposed to seven years. The fleet of trucks lasts 10 years and has a maintenance cost of $150,000 a year, payable at the end of each year. Assume there are no taxes, inflation is close to zero and XYZ, Inc.'s opportunity cost of capital is 6.00%. What is the equal annual cost of buying and operating the fleet of trucks? (Enter an amount rounded off to the nearest whole number but without the $ sign.) 1 point 12. Questions 11-15 are related to the same Mega problem. XYZ, Inc. is considering introducing a new product to add to its line up of existing products. The introduction of the new product will require the company buy a new fleet of trucks used to sell the products at a total cost of $1,150,000 at the end of three as opposed to seven years. The fleet of trucks lasts 10 years and has a maintenance cost of $150,000 a year, payable at the end of each year. On the other hand, selling the existing products and the new one will increase the revenues of XYZ, Inc. by $600,000 a year, but will add $300,000 to operational costs as well. Assume there are no taxes, inflation is close to zero and XYZ, Inc.'s opportunity cost of capital is 6.00%. Should XYZ, Inc. use the existing fleet of trucks to sell the new product? For convenience assume that the company will continue to replace the fleet of trucks every 10 years and will not use the fleet for the new product regardless of your decision about the existing fleet. Yes Need more information No 1 point 13. Questions 11-15 are related to the same Mega problem. XYZ, Inc. is considering introducing a new product to add to its line up of existing products. The introduction of the new product will require the company buy a new fleet of trucks used to sell the products at a total cost of $1,150,000 at the end of three as opposed to seven years. The fleet of trucks lasts 10 years and has a maintenance cost of $150,000 a year, payable at the end of each year. On the other hand, selling the existing products and the new one will increase the revenues of XYZ, Inc. by $600,000 a year, but will add $300,000 to operational costs as well. Assume there are no taxes, inflation is close to zero and XYZ, Inc.'s opportunity cost of capital is 6.00%. Suppose the company will continue to replace the fleet of trucks every 10 years and will not use the fleet for the new product regardless of your decision about the existing fleet. What is the Net Present Value of this decision in today's (t = 0) dollars? -$89,085 $137,035 $63,142 -$133,345 1 point 14. Questions 11-15 are related to the same Mega problem. XYZ, Inc. is considering introducing a new product to add to its line up of existing products. The introduction of the new product will require the company buy a new fleet of trucks used to sell the products at a total cost of $1,150,000 at the end of three as opposed to seven years. The fleet of trucks lasts 10 years and has a maintenance cost of $150,000 a year, payable at the end of each year. Assume inflation is close to zero and XYZ, Inc.'s opportunity cost of capital is 6.00%. Now assume the corporate tax rate is 34% and the fleet can be depreciated straight-line over 10 years and has no salvage value at the end of that period. What is the equal annual cost of a new fleet? (Enter an amount rounded off to the nearest whole number but without the $ sign.) 1 point 15. Questions 11-15 are related to the same Mega problem. XYZ, Inc. is considering introducing a new product to add to its line up of existing products. The introduction of the new product will require the company buy a new fleet of trucks used to sell the products at a total cost of $1,150,000 at the end of three as opposed to seven years. The fleet of trucks lasts 10 years and has a maintenance cost of $150,000 a year, payable at the end of each year. On the other hand, selling the existing products and the new one will increase the revenues of XYZ, Inc. by $600,000 a year, but will add $300,000 to operational costs as well. Assume inflation is close to zero and XYZ, Inc.'s opportunity cost of capital is 6.00%. Now assume the corporate tax rate is 34% and the fleet can be depreciated straight-line over 10 years and has no salvage value at the end of that period. Suppose the company will continue to replace the fleet of trucks every 10 years and will not use the fleet for the new product regardless of your decision about the existing fleet. What is the Net Present Value of this decision in today's (t = 0) dollars? -$99,598 -$201,203 $95,677 $148,170 1 point 16. Questions 16-20 are related to the same mega problem. Majestic, Inc. is a very profitable store in Houston, which is contemplating the replacement of a fully depreciated existing machine it had purchased for $22,500 five years ago. The replacement machine costs $37,500 and requires maintenance of $1,500 at the end of every year for ten years. The salvage/resale value of the new machine will be $7,500 at the end of 10 years. Once the old machine is replaced by the new machine, Majestic, Inc. expects to replace the new machine by a similar machine every ten years for the foreseeable future. The existing machine however requires increasing amounts of maintenance each year, and its salvage (or resale) value falls. If sold today (t = 0) it will fetch $8,250; if sold one year from now (at t = 1) it will fetch $6,000, if sold at t = 2, $2,250 and it will be worthless after three years (at t = 3). But at the same time, the maintenance costs will go up with every year the machine is retained: $2,250 in year 1, $6,000 in year 2 and $7,500 in year 3. For simplicity assume that maintenance costs are paid at the end of the year and ignore taxes for now. If Majestic, Inc. faces an opportunity cost of capital of 8.50 percent when should it replace the existing machine? Today (t = 0) Three years from now (t = 3) One year from now (t = 1) Two years from now (t = 2) 1 point 17. Questions 16-20 are related to the same mega problem. Majestic, Inc. is a very profitable store in Houston, which is contemplating the replacement of a fully depreciated existing machine it had purchased for $22,500 five years ago. The replacement machine costs $37,500 and requires maintenance of $1,500 at the end of every year for ten years. The salvage/resale value of the new machine will be $7,500 at the end of 10 years. Once the old machine is replaced by the new machine, Majestic, Inc. expects to replace the new machine by a similar machine every ten years for the foreseeable future. The existing machine however requires increasing amounts of maintenance each year, and its salvage (or resale) value falls. If sold today (t = 0) it will fetch $8,250; if sold one year from now (at t = 1) it will fetch $6,000, if sold at t = 2, $2,250 and it will be worthless after three years (at t = 3). But at the same time, the maintenance costs will go up with every year the machine is retained: $2,250 in year 1, $6,000 in year 2 and $7,500 in year 3. For simplicity assume that maintenance costs are paid at the end of the year and ignore taxes for now. If Majestic, Inc. faces an opportunity cost of capital of 8.50 percent what is the total cost in present value terms of making the decision (at t = 0) of replacing the old machine at the optimal time and then replacing the new machine every ten years in perpetuity? (Enter an amount rounded off to the nearest whole number but without the $ sign.) 1 point 18. Questions 16-20 are related to the same mega problem. Majestic, Inc. is a very profitable store in Houston, which is contemplating the replacement of a fully depreciated existing machine it had purchased for $22,500 five years ago. The replacement machine costs $37,500 and requires maintenance of $1,500 at the end of every year for ten years. The salvage/resale value of the new machine will be $7,500 at the end of 10 years. Once the old machine is replaced by the new machine, Majestic, Inc. expects to replace the new machine by a similar machine every ten years for the foreseeable future. The existing machine however requires increasing amounts of maintenance each year, and its salvage (or resale) value falls. If sold today (t = 0) it will fetch $8,250; if sold one year from now (at t = 1) it will fetch $6,000, if sold at t = 2, $2,250 and it will be worthless after three years (at t = 3). But at the same time, the maintenance costs will go up with every year the machine is retained: $2,250 in year 1, $6,000 in year 2 and $7,500 in year 3. For simplicity assume that maintenance costs are paid at the end of the year. Now assume that the tax rate is 34% and the new machine will be fully depreciated over 10 years using the straight-line method. If Majestic, Inc. faces an opportunity cost of capital of 8.50 percent what is the total cost in present value terms of making the decision (at t = 0) to replace the old machine today (at t = 0) and then replacing the new machine every ten years in perpetuity? (Enter an amount rounded off to the nearest whole number but without the $ sign.) 1 point 19. Questions 16-20 are related to the same mega problem. Majestic, Inc. is a very profitable store in Houston, which is contemplating the replacement of a fully-depreciated existing machine it had purchased for $22,500 five years ago. The replacement machine costs $37,500 and requires maintenance of $1,500 at the end of every year for ten years. The salvage/resale value of the new machine will be $7,500 at the end of 10 years. Once the old machine is replaced by the new machine, Majestic, Inc. expects to replace the new machine by a similar machine every ten years for the foreseeable future. The existing machine however requires increasing amounts of maintenance each year, and its salvage (or resale) value falls. If sold today (t = 0) it will fetch $8,250; if sold one year from now (at t = 1) it will fetch $6,000, if sold at t = 2, $2,250 and it will be worthless after three years (at t = 3). But at the same time, the maintenance costs will go up with every year the machine is retained: $2,250 in year 1, $6,000 in year 2 and $7,500 in year 3. For simplicity assume that maintenance costs are paid at the end of the year. Now assume that the tax rate is 34% and the new machine will be fully depreciated over 10 years using the straight-line method. If Majestic, Inc. faces an opportunity cost of capital of 8.50 percent, what is the total cost in present value terms of making the decision (at t = 0) to replace the old machine at the end of the third year (at t = 3) and then replacing the new machine every ten years in perpetuity thereafter? (Enter an amount rounded off to the nearest whole number but without the $ sign.) 1 point 20. Questions 16-20 are related to the same mega problem. Majestic, Inc. is a very profitable store in Houston, which is contemplating the replacement of a fully-depreciated existing machine it had purchased for $22,500 five years ago. The replacement machine costs $37,500 and requires maintenance of $1,500 at the end of every year for ten years. The salvage/resale value of the new machine will be $7,500 at the end of 10 years. Once the old machine is replaced by the new machine, Majestic, Inc. expects to replace the new machine by a similar machine every ten years for the foreseeable future. The existing machine however requires increasing amounts of maintenance each year, and its salvage (or resale) value falls. If sold today (t = 0) it will fetch $8,250; if sold one year from now (at t = 1) it will fetch $6,000, if sold at t = 2, $2,250 and it will be worthless after three years (at t = 3). But at the same time, the maintenance costs will go up with every year the machine is retained: $2,250 in year 1, $6,000 in year 2 and $7,500 in year 3. For simplicity assume that maintenance costs are paid at the end of the year. Now assume that the tax rate is 34% and the new machine will be fully depreciated over 10 years using the straight-line method. If Majestic, Inc. faces an opportunity cost of capital of 8.50 percent, when should it replace the existing machine? Three years from now (t = 3) Two years from now (t = 2) One year from now (t = 1) Today (t = 0)