Please see the attached 2 questions..... There are samples as well

SAMPLE QUESTION AND SOLUTION WITH STEPS OF HOW TO WORK IT #1 The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the NPV of its proposed toad ranch. BICC plans to breed toads and sell them as ecologically desirable insect control mechanisms. They anticipate that the business will continue into perpetuity. Following the negligible start-up costs, BICC expects the following nominal cash flows at the end of the year: Revenues Labor costs Other costs $ 280,000 200,000 70,000 The company will lease machinery for $105,000 per year. The lease payments start at the end of Year 1 and are expressed in nominal terms. Revenues will increase by 5 percent per year in real terms. Labor costs will increase by 4 percent per year in real terms. Other costs will increase by 2 percent per year in real terms. The rate of inflation is expected to be 7 percent per year. BICC's required rate of return is 12 percent in real terms. The company has a 38 percent tax rate. All cash flows occur at year-end. What is the NPV of BICC's proposed toad ranch today? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).) NPV $ 143,334.97 0.1% Explanation: The discount rate is expressed in real terms, and the cash flows are expressed in nominal terms. We can answer this question by converting all of the cash flows to real dollars. We can then use the real interest rate. The real value of each cash flow is the present value of the Year 1 nominal cash flows, discounted back to the present at the inflation rate. So, the real value of the revenue and costs will be: Revenue in real terms = $280,000 / 1.07 = $261,682.24 Labor costs in real terms = $200,000 / 1.07 = $186,915.89 Other costs in real terms = $70,000 / 1.07 = $65,420.56 Lease payment in real terms = $105,000 / 1.07 = $98,130.84 Revenues, labor costs, and other costs are all growing perpetuities. Each has a different growth rate, so we must calculate the present value of each separately. Using the real required return, the present value of each of these is: PVRevenue = $261,682.24 / (.12 .05) = $3,738,317.76 PVLabor costs = $186,915.89 / (.12 .04) = $2,336,448.60 PVOther costs = $65,420.56 / (.12 .02) = $654,205.61 The lease payments are constant in nominal terms, so they are declining in real terms by the inflation rate. Therefore, the lease payments form a growing perpetuity with a negative growth rate. The real present value of the lease payments is: PVLease payments = $98,130.84 / [.12 (.07)] = $516,478.11 Now we can use the tax shield approach to calculate the net present value. Since there is no investment in equipment, there is no depreciation; therefore, no depreciation tax shield, so we will ignore this in our calculation. This means the cash flows each year are equal to net income. There is also no initial cash outlay, so the NPV is the present value of the future aftertax cash flows. The NPV of the project is: NPV = (PVRevenue PVLabor costs PVOther costs PVLease payments)(1 tC) NPV = ($3,738,317.76 2,336,448.60 654,205.61 516,478.11)(1 .38) NPV = $143,334.97 NOW THIS IS THE ONE THAT I HAVE TO ANSWER The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the NPV of its proposed toad ranch. BICC plans to breed toads and sell them as ecologically desirable insect control mechanisms. They anticipate that the business will continue into perpetuity. Following the negligible start-up costs, BICC expects the following nominal cash flows at the end of the year: Revenues Labor costs Other costs $ 279,000 199,000 69,000 The company will lease machinery for $104,000 per year. The lease payments start at the end of Year 1 and are expressed in nominal terms. Revenues will increase by 6 percent per year in real terms. Labor costs will increase by 5 percent per year in real terms. Other costs will increase by 3 percent per year in real terms. The rate of inflation is expected to be 8 percent per year. BICC's required rate of return is 14 percent in real terms. The company has a 35 percent tax rate. All cash flows occur at year-end. What is the NPV of BICC's proposed toad ranch today? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).) NPV $ SAMPLE QUESTION AND ANSWER NUMBER 2 Yasmin Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $530,000 is estimated to result in $220,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $89,000. The press also requires an initial investment in spare parts inventory of $26,000, along with an additional $3,100 in inventory for each succeeding year of the project. The shop's tax rate is 35 percent and its discount rate is 9 percent. Refer to Table 8.3. Calculate the NPV of this project. (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).) $ NPV Should 114,770.55 0.1% the company buy and install Yes Explanation: First, we will calculate the depreciation each year, which will be: D1 = $530,000(.2000) = $106,000 D2 = $530,000(.3200) = $169,600 D3 = $530,000(.1920) = $101,760 D4 = $530,000(.1152) = $61,056 The book value of the equipment at the end of the project is: BV4 = $530,000 ($106,000 + 169,600 + 101,760 + 61,056) BV4 = $91,584 The asset is sold at a loss to book value, so this creates a tax refund. Aftertax salvage value = $89,000 + ($91,584 89,000)(.35) Aftertax salvage value = $89,904.40 So, the OCF for each year will be: the machine press? OCF1 = $220,000(1 .35) + .35($106,000) = $180,100.00 OCF2 = $220,000(1 .35) + .35($169,600) = $202,360.00 OCF3 = $220,000(1 .35) + .35($101,760) = $178,616.00 OCF4 = $220,000(1 .35) + .35($61,056) = $164,369.60 Now we have all the necessary information to calculate the project NPV. We need to be careful with the NWC in this project. Notice the project requires $26,000 of NWC at the beginning, and $3,100 more in NWC each successive year. We will subtract the $26,000 from the initial cash flow, and subtract $3,100 each year from the OCF to account for this spending. In Year 4, we will add back the total spent on NWC, which is $35,300. The $3,100 spent on NWC capital during Year 4 is irrelevant. Why? Well, during this year the project required an additional $3,100, but we would get the money back immediately. So, the net cash flow for additional NWC would be zero. With all this, the equation for the NPV of the project is: NPV = $530,000 26,000 + ($180,100.00 3,100) / 1.09 + ($202,360.00 3,100) / 1.092 + ($178,616.00 3,100) / 1.093 + ($164,369.60 + 35,300 + 89,904.40) / 1.094 NPV = $114,770.55 NOW THIS IS THE ONE THAT I HAVE TO ANSWER Yasmin Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $490,000 is estimated to result in $200,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $82,000. The press also requires an initial investment in spare parts inventory of $22,000, along with an additional $2,700 in inventory for each succeeding year of the project. The shop's tax rate is 34 percent and its discount rate is 10 percent. Refer to Table 8.3. Calculate the NPV of this project. (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).) $ NPV Should Yes the company buy and install the machine press