Question 2

The management of Kimco is evaluating the possibility of replacing their large mainframe computer with a modern network system that requires much less office space. The network would cost $660,000 (including installation costs) and would save $170,000 per year in net cash flows (accounting for taxes and depreciation) in Year 1-3, $16,000 in year 4, and $150,000 in year 5 due to efficiency gains. The current mainframe has a remaining book value of $80,000 and would be immediately sold for $60,000. Kimco's discount rate is 10%, and its tax rate is 25%. Based on NPV, should management install the network system?

Question 3

Glucose Scan Incorporated (GSI) currently sells its latest glucose monitor, the Glucoscan 3000, to diabetic patients for $129.GSI plans on lowering their price next year to $99 per unit.The cost of goods sold for each Glucoscan unit is $50, and GSI expects to sell 100,000 units over the next year.(1) Suppose that if GSI drops the price on the Glucoscan 3000 immediately, it can increase sales over the next year by 35% to 135,000 units. What is the incremental impact of this price drop on the firms EBIT?(Hint: EBIT=Sales-COGS)

(2) Suppose that if GSI drops the price on the Glucoscan 3000 immediately, it can increase sales over the next year by 35% to 135,000 units.Also suppose that for each Glucoscan monitor sold, GSI expects additional sales of $100 per year on glucose testing strips and these strips have a gross profit margin of 70%.Considering the increase in the sale of testing strips, what is the incremental impact of this price drop on the firms EBIT? (Hint: EBIT=Sales-COGS)

Question 5

Project ABC has an initial cost of $1,000 and generates cash inflow of $2,000 at the end of year 1. Project QRS has an initial cost of $10,000 and has annual cash inflows of $4,400, $4,840, and $5,324 in year 1-3. Assuming a 10% discount rate, calculate the net present value and profitability index for both projects. Which project is better in terms of NPV?(3 points) Which project is better in terms of PI? (3 points)

Question 6

What are some potential problems in using internal rate of return (IRR) for mutually exclusive projects?

Question 7

You and your colleague, Michael, are debating how to best handle a large expenditure on a piece of machinery as a capital budgeting decision. Michael says that his accounting background suggests that because the benefits of this large piece of machinery will be realized over the project's ten-year life, so should its costs. Discuss why you disagree ordisagree with Michael.

Question 8

You are purchasing an equipment for $ 200,000 for your new store. Assume the store has no other expenses or revenues other than those associated with this project. You are going to purchase an additional $ 12,500 of inventory for production with the new equipment and set up a cash account with a $ 2,000 balance. The inventory purchase will result in an account payable of $ 4,500. The firm's tax rate is 20%. What is the net cash flow at time zero?