Question 2 CLO 3 Capital Investment Decision (20 marks) Shunt Technology will spend $800,000 on a piece of equipment that will manufacture fine wire for the electronics industries The shipping and installation charges will be $240,000 and net working capital will increase $48,000 The equipment will replace an existing machine that has a salvage value of $75,000 and a book value of $125,000 If Shunt has a current marginal tax rate of 34 percent, what is the net investment (4 marks) For a project that has a net investment of $150,000 and net cash flows of $40,000 for 5 years Is the internal rate of return between (9 and 10 ) or (10 and 11 ) Explain your answer (7 marks) A project has an expected NPV of $50,000 with a standard deviation of the NPV of $20,000 Assume that NPV is normally distributed What is the probability that the project will have a net present value greater than $60,000 (3 marks) Rollerblade, a maker of skating gear, is evaluating two alternative presses Press A costs $88,000, has a 4 year life, and is expected to generate annual cash inflows of $30,100 in each of the 4 years Press B costs $122,000, has an 8 year life, and is expected to generate annual cash inflows of $24,600 in each of 8 years The cost of replacement for A is $96,000, and the replacement press will generate cash inflows of $30,100 for another 4 years Rollerblade uses a 12 cost of capital Which press should be chosen (6 marks)

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Question 2: CLO 3 Capital Investment Decision (20 marks) Shunt Technology will spend $800,000 on a piece of equipment that will manufacture fine wire for

Question 2: CLO 3 Capital Investment Decision (20 marks)

Shunt Technology will spend $800,000 on a piece of equipment that will

manufacture fine wire for the electronics industries. The shipping and installation

charges will be $240,000 and net working capital will increase $48,000. The equipment will replace an existing machine that has a salvage value of $75,000

and a book value of $125,000. If Shunt has a current marginal tax rate

of 34 percent, what is the net investment? (4 marks)

For a project that has a net investment of $150,000 and net cash flows of $40,000 for 5 years; Is the internal rate of return between (9% and 10%) or (10% and 11%). Explain your answer. (7 marks)
A project has an expected NPV of $50,000 with a standard deviation of the NPV of $20,000. Assume that NPV is normally distributed. What is the probability that the project will have a net present value greater than $60,000? (3 marks)
Rollerblade, a maker of skating gear, is evaluating two alternative presses. Press A costs $88,000, has a 4-year life, and is expected to generate annual cash inflows of $30,100 in each of the 4 years. Press B costs $122,000, has an 8-year life, and is expected to generate annual cash inflows of $24,600 in each of 8 years. The cost of replacement for A is $96,000, and the replacement press will generate cash inflows of $30,100 for another 4 years. Rollerblade uses a 12% cost of capital. Which press should be chosen? (6 marks)