Problem 11-4 Replacement Analysis

Although the Chen Company's milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $42,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $8,800 per year. It would have zero salvage value at the end of its life. The firm's WACC is 12%, and its marginal tax rate is 35%. Should Chen buy the new machine?

Problem 11-5 Depreciation Methods

Wendy's boss wants to use straight-line depreciation for the new expansion project because he said it will give higher net income in earlier years and give him a larger bonus. The project will last 4 years and requires $600,000 of equipment. The company could use either straight-line or the 3-year MACRS accelerated method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life (ignore the half-year convention for the straight-line method). The applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. The company's WACC is 8%, and its tax rate is 50%.

What would the depreciation expense be each year under each method?

Year	Scenario 1 (Straight Line)	Scenario 2 (MACRS)
1	$	$
2	$	$
3	$	$
4	$	$

Which depreciation method would produce the higher NPV? -Select-Scenario 1 or scenario 2? How much higher would it be? Round your answer to the nearest dollar. $ _____

Problem 11-6 New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,140,000, and it would cost another $16,500 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $659,000. The machine would require an increase in net working capital (inventory) of $12,500. The sprayer would not change revenues, but it is expected to save the firm $463,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 40%.

What is the Year-0 net cash flow? $

What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.

Year 1	$
Year 2	$
Year 3	$

What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital)? Round your answer to the nearest dollar. $

If the project's cost of capital is 12 %, what is the NPV of the project? Round your answer to the nearest dollar. $ Should the machine be purchased?

Problem 11-8 Inflation Adjustments

The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has a cost of $170,000. The project will produce 800 cases of mineral water per year indefinitely. The current sales price is $133 per case, and the current cost per case is $101. The firm is taxed at a rate of 34%. Both prices and costs are expected to rise at a rate of 6% per year. The firm uses only equity, and it has a cost of capital of 14%. Assume that cash flows consist only of after-tax profits, since the spring has an indefinite life and will not be depreciated.

What is the NPV of the project? Do not round intermediate steps. Round your answer to the nearest hundred dollars. (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) $ Should the firm accept the project? -Select-yes or no?

Suppose that total costs consisted of a fixed cost of $10,500 per year plus variable costs of $90 per unit, and suppose that only the variable costs were expected to increase with inflation. Would this make the project better or worse? Continue with the assumption that the sales price will rise with inflation. This will make the project -Select- better or worse?