ng at setting up a ten The company bought using it as a warchou bese facilities from net S4.1 will is land: the plant will rth of grading before unt to use as the initial 20.000 motor homes PROBLEMS 1. Relevant Cash Flows (LO1] Parker & Stone, Inc., is looking at manufacturing plant in South Park to produce garden tools. The some land six years ago for $3.6 million in anticipation of using it and distribution site, but the company has since decided to rent these far competitor instead. If the land were sold today, the company would net The company wants to build its new manufacturing plant on this land: th cost $18.1 million to build, and the site requires $950,000 worth of gradi is suitable for construction. What is the proper cash flow amount to use a investment in fixed assets when evaluating this project? Why? 2. Relevant Cash Flows (L01] Winnebagel Corp. currently sells 20.000 motor per year at $97,000 each and 14,000 luxury motor coaches per year at $145.000 The company wants to introduce a new portable camper to fill out its production it hopes to sell 30,000 of these campers per year at $21,000 each. An independem consultant has determined that if the company introduces the new campers, it should boost the sales of its existing motor homes by 2,700 units per year and reduce the sales of its motor coaches by 1,300 units per year. What is the amount to use as the annual sales figure when evaluating this project? Why? 3. Calculating Projected Net Income (L01] A proposed new investment has pro jected sales of $585,000. Variable costs are 44 percent of sales, and fixed costs are $187,000; depreciation is $51,000. Prepare a pro forma income statement assuming a tax rate of 21 percent. What is the projected net income? 4. Calculating OCF [LOL] Consider the following income statement: Sales Costs Depreciation EBIT Taxes (22%) Net income $747,300 582,600 89,300 Fill in the missing numbers and then calculate the OCF. What is the dep shield? s the depreciation or OCF from Several Approaches (L01 A proposed new proje sales of $175,000, costs of $93,000, and depreciation of $24,00 23 percent. Calculate operating cash flow using the four diffe scribed in the chapter and verify that the answer is the same in e project has proje $24.800. The taxa " approaches the same in each case. worth of grading before want to use as the 20.000 motobom cat $145.00 all out its product line each. An independent The company wants IU DIT cost $18.1 million to build, and the site requires $950,000 worth is suitable for construction. What is the proper cash flow amount investment in fixed assets when evaluating this project? Why? 2. Relevant Cash Flows (L01] Winnebagel Corp. currently sells 20.00 per year at $97,000 each and 14,000 luxury motor coaches per year at $1. The company wants to introduce a new portable camper to fill out its it hopes to sell 30,000 of these campers per year at $21,000 each. Ani consultant has determined that if the company introduces the new cam boost the sales of its existing motor homes by 2,700 units per year and sales of its motor coaches by 1,300 units per year. What is the amount to annual sales figure when evaluating this project? Why? 3. Calculating Projected Net Income [LO1] A proposed new investment ha jected sales of $585,000. Variable costs are 44 percent of sales, and fixed costs $187,000; depreciation is $51,000. Prepare a pro forma income statement assumine a tax rate of 21 percent. What is the projected net income? 4. Calculating OCF [LOL] Consider the following income statement: he new campers, it should per year and reduce the the amount to use as the Sales Costs Depreciation EBIT Taxes (22%) Net income $747,300 582,600 89,300 Fill in the missing numbers and then calculate the OCF. What is the depreciatio shield? 5. OCF from Several Approaches ILOI1 A proposed new project na sales of $175,000, costs of $93,000, and depreciation of $24.800. The 23 percent. Calculate operating cash flow using the four different app scribed in the chapter and verify that the answer is the same in each case project has projected 10. The tax rates nt approaches de Chapter 10 Making Capital Investment Decisions 6 Calculatina costs $1.375,000 and i Calculating Salvage Val preciated straight-line five-year project; at the relevant tax rate is 21 iation [LO1] A piece of newly purchased industrial equipment 100 and is classified as seven-year property under MACRS. Calculate the ion allowances and end-of-the-year book values for this equipment. Salyage Value (L01] Consider an asset that costs $680,000 and is de- straight-line to zero over its eight-year tax life. The asset is to be used in a ar project; at the end of the project, the asset can be sold for $143.000. If the tax rate is 21 percent, what is the aftertax cash flow from the sale of this asset? culating Salvage Value [LOI An asset used in a four-year project falls in five-year MACRS class for tax purposes. The asset has an acquisition cost of 65100,000 and will be sold for $1,600,000 at the end of the project. If the tax rate is 21 percent, what is the aftertax salvage value of the asset? . Calculating Project OCF (L01] Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.32 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1.735 million in annual sales, with costs of $650,000. If the tax rate is 21 percent, what is the OCF for this project? 10. Calculating Project NPV [LO1] In the previous problem, suppose the required return on the project is 12 percent. What is the project's NPV? 11. Calculating Project Cash Flow from Assets [LO1] In the previous problem, sup- pose the project requires an initial investment in net working capital of $250,000, and 12. NPV and MA falls into the three-year M project's Year 1 net cash fixed asset will have a market value of $180.000 at the end of the project. What is project's Year 0 net cash flow? Year 1? Year 2? Year 3? What is the new NPV? and MACRS (LO1] In the previous problem, suppose the fixed asset actually le three-year MACRS class. All the other facts are the same. What is the Tear I net cash flow now? Year 2? Year 3? What is the new NPV? Bonus Depreciation LO1] In the previous problem, suppose the fixed any qualifies for 100 percent bonus depreciation in the first year. All the are the same. What is the project's Year 1 net cash flow now? Year 2? 13. NPV and Bonus asset actually qualit other facts are the ear 3? What is the new NPV? Project Evaluation L with an installed costo Zero over the project Scrapped for $55,000. The Pelax operating costs, Capital of ation (LO1] Dog Up! Franks is looking at a new sausage system ed cost of $460,000. This cost will be depreciated straight-line to project's five-year life, at the end of which the sausage system can be 00. The sausage system will save the firm $155,000 per year in costs, and the system requires an initial investment in net working 71 percent and the discount rate is 10 percent