Problem 9-16 Project Evaluation (LO2) Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification system for $12 million. The system will last 6 years. Do-It-Right sells a sturdier but more expensive system for $20 million, it will last for 8 years. Both systems entail $1 million in operating costs; both will be depreciated straight-line to a final value of zero over their useful lives; neither will have any salvage value at the end of its life. The firm's tax rate is 30%, and the discount rate is 13%. Either machine will be replaced at the end of its life. a. What is the equivalent annual cost of investing in the cheap system? (Do not round intermediate calculations. Enter your answer as a positive value. Enter your answer in millions rounded to 2 decimal places.) b. What is the equivalent annual cost of investing in the more expensive system? (Do not round intermediate calculations. Enter your answer as a positive value. Enter your answer in millions rounded to 2 decimal places.) c. Which system should Blooper install? a. b. Equivalent annual cost Equivalent annual cost Which system should Blooper install? millions millions Problem 9-22 Salvage Value (LO3) Your firm purchased machinery for $9.2 million and received immediate 100% bonus depreciation. The project, will end after 5 years. If the equipment can be sold for $3.7 million at the completion of the project, and your firm's tax rate is 21%, what is the after-tax cash flow from the sale of the machinery? (Enter your answer in millions rounded to 4 decimal places.) After-tax cash flow millions Problem 9-34 Project Evaluation (L04) The following table presents sales forecasts for Golden Gelt Giftware. The unit price is $50. The unit cost of the giftware is $30. Year Unit Sales 31,000 39,000 13,000 7,000 Thereafter It is expected that net working capital will amount to 20% of sales in the following year. For example, the store will need an initial (Year 0) investment in working capital of 20 x 31,000 - $50 = $310,000. Plant and equipment necessary to establish the giftware business will require an additional investment of $209,000. This investment will be depreciated straight-line over 3 years. After 4 years, the equipment will have an economic and book value of zero. The firm's tax rate is 30%. The discount rate is 14%. a. What is the net present value of the project? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.) Answer is complete and correct. Net present value $ 723,052 b. By how much does NPV increase if the firm takes immediate 100% bonus depreciation? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.) Answer is complete but not entirely correct. Increase in NPV $ 4,109
