Question 3

A. Platinum Water Entertainment is evaluating the laundromat project, a 2-year project that would involve buying equipment for 40,000 dollars that would be depreciated to zero over 2 years using straight-line depreciation. Cash flows from capital spending would be $0 in year 1 and 6,000 dollars in year 2. Relevant annual revenues are expected to be 59,000 dollars in year 1 and 59,000 dollars in year 2. Relevant expected annual variable costs from the project are expected to be 10,000 dollars in year 1 and 10,000 dollars in year 2. Finally, the firm has no fixed costs in year 1 and one fixed cost in year 2 of the project. Yesterday, Platinum Water Entertainment signed a deal with Orange Valley Marketing to develop an advertising campaign. The terms of the deal require Platinum Water Entertainment to pay Orange Valley Marketing either 86,000 dollars in 2 years from today if the laundromat project is pursued or 60,000 dollars in 2 years from today if the laundromat project is not pursued. The tax rate is 30 percent and the cost of capital for the laundromat project is 6 percent. What is the net present value of the laundromat project?

B. Violet Sky Health is considering a project that would last for 2 years. The project would involve an initial investment of 71,000 dollars for new equipment that would be sold for an expected price of 68,000 dollars at the end of the project in 2 years. The equipment would be depreciated to 19,000 dollars over 4 years using straight-line depreciation. In years 1 and 2, relevant annual revenue for the project is expected to be 64,000 dollars per year and relevant annual costs for the project are expected to be 20,000 dollars per year. The tax rate is 50 percent and the cost of capital for the project is 7.36 percent. What is the net present value of the project?

C.

What is the net present value of the stadium project, which is a 3-year project where Fairfax Pizza would sell pizza in the baseball stadium? The project would involve an initial investment in equipment of 135,000 dollars today. To finance the project, Fairfax Pizza would borrow 135,000 dollars. The firm would receive 135,000 dollars from the bank today and would pay the bank 183,600 dollars in 3 years (consisting of an interest payment of 48,600 dollars and a principal payment of 135,000 dollars). Cash flows from capital spending would be 0 dollars in year 1, 0 dollars in year 2, and 20,000 dollars in year 3. Operating cash flows are expected to be 89,100 dollars in year 1, 87,750 dollars in year 2, and -51,300 dollars in year 3. The cash flow effects from the change in net working capital are expected to be -9,000 dollars at time 0; 3,000 dollars in year 1; -6,000 dollars in year 2; and 12,000 dollars in year 3. The tax rate is 25 percent. The cost of capital is 10.82 percent and the interest rate on the loan would be 10.79 percent.

D. Middlefield Motors is evaluating project Z. The project would require an initial investment of 75,500 dollars that would be depreciated to 8,000 dollars over 7 years using straight-line depreciation. The first annual operating cash flow of 26,000 dollars is expected in 1 year, and annual operating cash flows of 26,000 dollars are expected each year forever. Middlefield Motors expects the project to have an after-tax terminal value of 284,000 dollars in 5 years. The tax rate is 35 percent. What is (X+Y)/Z if X is the projects relevant expected cash flow for NPV analysis in year 5, Y is the projects relevant expected cash flow for NPV analysis in year 6, and Z is the projects relevant expected cash flow for NPV analysis in year 4? Round your answer to 2 decimal places (for example, 2.89, 0.70, or 1.00)

E.

What is the expected after-tax cash flow from selling a piece of equipment if Blue Eagle Banking purchases the equipment today for 133,000 dollars, the tax rate is 20 percent, the equipment will be sold in 2 years for 81,000 dollars, and the equipment will be depreciated to 5,000 dollars over 16 years using straight-line depreciation?