P11-4 You are evaluating a project for The Farpour golf dlub, guaranteed to correct For Projec D: rBE(-r that nasty slice. You estimate the sales price of The Tiff-any to be $400 per unit and sales volume to be 1000 units in year ; 1500 units in year 2; and 1325 units in year 3. The project has a three-year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 in assets which will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $35,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 10 percent. What change in NWC occurs at the end of year 1? P11- Y are trying to pick the least-expensive car for your new delivery service. You have two choices: the Wee Usegas, which will cost $14,000 to purchase and which will have OCF of-$1,200 annually throughout the vehicle's expected life of three years as a delivery vehidle; and the Plugitin, which will cost $20,000 to purchase and which will have 0CF of -$650 annually throughout that vehicles expected four-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 12 percent, which one should you choose? Solve by calculating the Equivalent Annual Cost (EAC) for each car. To calculate the EAC: P11-5 Consider the following cash flows: Year0 Cash Flow $5,000 $1,200 $2,400 $1,600 $1,600 $1,400 $1,200 1) Calculate the NPV of one car 2) Using this NPV, Calculate the payment of an annuity that would have A. Payback The company requires all projects to payback within 3 years. Calculate the payback period. Should it be accepted or rejected? the same life as the car and the same NPV B. Discounted Payback Calculate the discounted payback sing a discount rate of P11-2 896. Should it be accepted or rejected? Apricot, Inc. has spent $400,000 on research to develop a new computer game. The firm is planning to spend $200,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of 3 years, a $75,000 estimated resale value, and falls under the MACRS 7-Year class life. Revenue from the new game is expected to be $600,000 per year, with costs of $250,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the cash flows for this project be? Cash Flow $5,000 $1,200 $2,400 $1,600 $1,600 $1,400 $1,200 C. IRR Calculate the IRR for this project. Should it be accepted or rejected? D. NPV Calculate the NPV for this project. Should it be accepted or rejected? P11-3 Your firm needs a computerized machine tool lathe which costs $50,000, and requires $12,000 in maintenance for each year of its 3 year life. After 3 years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 35% and a discount rate of 12%. E. PI Calculate the Profitability Index (PI) for this project. Should it be accepted or rejected? The profitability Index is: NPV/Initial Cost A. Calculate the depreciation tax shield for this project in year 3. B. If the lathe can be sold for $5,000 at the end of year 3, what is the End of document after tax salvage value