Percentages need to be entered in decimal format, for instance 3% would be entered as .03.

Golden State Bakers, Inc. (GSB) has an opportunity to invest in a new dough machine. GSB needs more productive capacity, so the new machine will not replace an existing machine. The new machine is priced at $260,000 and will require modifications costing $15,000. The machine has an expected useful life of 10 years, will be depreciated using the MACRS method over its 5-year class life, and has an expected salvage value of $12,500 at the end of Year 10. (See Table 10A.2 for MACRS recovery allowance percentages on page 184 in the textbook.) The machine will require a $22,500 investment in net working capital (NWC). The machine is expected to generate additional sales revenues of $125,000 per year, but its use also will increase annual cash operating expenses by $55,000. GSB's required rate of return is 10%, and its marginal tax rate is 40%. The machine's book value at the end of Year 10 be $0, so GSB will have to pay taxes on the $12,500 salvage value. (This information is shown on the spreadsheet provided.)

1. Based on the information in the spreadsheet, what is the NPV for of this expansion project? Should GSB purchase the new machine? Why or why not?
2. Should GSB purchase the new machine if it is expected to be used for only five years and then sold for $31,250? Why or why not? (Note that the model on the spreadsheet is already set up to handle a five-year life; you need enter only the new live and salvage value.)
3. Would the machine be profitable if revenues increased by only $105,000 per year? Assume a 10-year project life and a salvage value of $12,500. Explain your answer.
4. Suppose that revenues rose by $125,000, but expenses (operating costs) were $65,000. Would the machine be acceptable under these conditions? Assume a 10-year project life and a salvage value of $12,500. Explain your answer.
5. Suppose the revenues rose by $100,000, but expenses (operating costs) were $45,000. Would the machine be acceptable under these conditions? Assume a 10-year project life and a salvage value of $12,500. Explain your answer

Chapter 10 Spreadsheet-Related Problem (C10) Expansion Project 1. There are a number of instructions with which you should be familiar to use these computerized models. These instructions appear in a separate worksheet labeled INSTRUCTIONS. If you have not already done so, you should read these instructions now. To read these instructions.click on theworksheet labeled INSTRUCTIONS 2. The model is set up to deal with a situation where the entire investment outlay occurs at two and the inflows occur over the subsequent five to 10 years. Modification of the model would be required to deal with a shorter or longer time frame. INPUT DATA: KEY OUTPUT: Base price (5260,000) NPV Modifications ($15,000) 57186 Increase in NWC ($22,500) Increase in sales revenue 125.000 Operating costs 55.000 Salvage value 12.500 Required rate of return 10% Tax rate 40% MACRS class life (years) 5 Useful life (years) 10 MODEL-GENERATED DATA: Initial investment at t=0 Base price (5260,000) Modification ($15,000) Increase in NWC ($22.500 Initial investment outlay 5297,500) Depreciation schedule Terminal cash flow Depr. basis - $275.000 Salvage value Tax on sale of asset Reverse of NWC Terminal CF Year 12.500 (5,000) 22.500 30.000 1 2 3 4 5 6 MACRS Depreciation Rate Allowance 0.20 55,000 0.32 88.000 0.19 52.250 0.12 33.000 0.11 30.250 0.06 16.500 Ending Book Value 220,000 132.000 79.750 46.750 16.500 0 1 3 5 6 7 10 Annual cash flows: 0 Initial invest (297,500) Sales increase Operating costs Depreciation Earn. bif taxes Taxes Net Income Add back deprec. Supplemental oper. CF Salvage AT Net cash flow (297.500 125.000 (55.000) (55.000) 15.000 (6.000) 9.000 55.000 64000 125,000 (55.000) 188.000) (18.000) 7.200 (10,800) 89.000 77200 125,000 (55,000) (52.2501 17.750 7.100) 107650 52.250 62.900 0 62.900 125,000 (55,000) (33.000) 37.000 (14.800) 22.200 33.000 55.200 0 55.200 125,000 125.000 125.000 125,000 125,000 125.000 (55.000) (55.000) (55.000) (55.000) (55.000) (55,000) (30.250) (16.500) 0 0 0 O 39.750 53,500 70.000 70,000 70,000 70.000 (15.900) (21.400) (28.000) (28.000) (28.000) (28,000) 23,850 32.100 42.000 42,000 42.000 42,000 30,250 16.500 0 0 0 0 54,100 48600 42.000 42.000 42.000 42.000 0 0 0 0 0 30.000 54.100 48.600 42.000 42.000 42.000 72.000 64.000 72200 NPV 57.186 Chapter 10 Spreadsheet-Related Problem (C10) Expansion Project 1. There are a number of instructions with which you should be familiar to use these computerized models. These instructions appear in a separate worksheet labeled INSTRUCTIONS. If you have not already done so, you should read these instructions now. To read these instructions.click on theworksheet labeled INSTRUCTIONS 2. The model is set up to deal with a situation where the entire investment outlay occurs at two and the inflows occur over the subsequent five to 10 years. Modification of the model would be required to deal with a shorter or longer time frame. INPUT DATA: KEY OUTPUT: Base price (5260,000) NPV Modifications ($15,000) 57186 Increase in NWC ($22,500) Increase in sales revenue 125.000 Operating costs 55.000 Salvage value 12.500 Required rate of return 10% Tax rate 40% MACRS class life (years) 5 Useful life (years) 10 MODEL-GENERATED DATA: Initial investment at t=0 Base price (5260,000) Modification ($15,000) Increase in NWC ($22.500 Initial investment outlay 5297,500) Depreciation schedule Terminal cash flow Depr. basis - $275.000 Salvage value Tax on sale of asset Reverse of NWC Terminal CF Year 12.500 (5,000) 22.500 30.000 1 2 3 4 5 6 MACRS Depreciation Rate Allowance 0.20 55,000 0.32 88.000 0.19 52.250 0.12 33.000 0.11 30.250 0.06 16.500 Ending Book Value 220,000 132.000 79.750 46.750 16.500 0 1 3 5 6 7 10 Annual cash flows: 0 Initial invest (297,500) Sales increase Operating costs Depreciation Earn. bif taxes Taxes Net Income Add back deprec. Supplemental oper. CF Salvage AT Net cash flow (297.500 125.000 (55.000) (55.000) 15.000 (6.000) 9.000 55.000 64000 125,000 (55.000) 188.000) (18.000) 7.200 (10,800) 89.000 77200 125,000 (55,000) (52.2501 17.750 7.100) 107650 52.250 62.900 0 62.900 125,000 (55,000) (33.000) 37.000 (14.800) 22.200 33.000 55.200 0 55.200 125,000 125.000 125.000 125,000 125,000 125.000 (55.000) (55.000) (55.000) (55.000) (55.000) (55,000) (30.250) (16.500) 0 0 0 O 39.750 53,500 70.000 70,000 70,000 70.000 (15.900) (21.400) (28.000) (28.000) (28.000) (28,000) 23,850 32.100 42.000 42,000 42.000 42,000 30,250 16.500 0 0 0 0 54,100 48600 42.000 42.000 42.000 42.000 0 0 0 0 0 30.000 54.100 48.600 42.000 42.000 42.000 72.000 64.000 72200 NPV 57.186