Suppose Blue Thumb Tools is considering the introduction of a new, heavier hammer to be used for driving spikes The new hammer will cost $490,000 The cost will be depreciated straight line to zero over the projects five year life, at the end of which the new hammer can be scrapped for $40,000 The new hammer will save the firm $146,000 per year in pretax operating costs, and it required an initial investment in net working capital of $35,000 The tax rate of the firm is 30 What are the cash flows of firms new project (using a time line) WACC 11 11 year 0 1 2 3 4 5 savings 146000 146000 146000 146000 146000 depreciation 90000 90000 90000 90000 90000 EBIT 56000 56000 56000 56000 56000 tax 30 16800 16800 16800 16800 16800 EAT 39200 39200 39200 39200 39200 depreciation 90000 90000 90000 90000 90000 Operating Cash Flows 129200 129200 129200 129200 129200 cost 490000 NWC 35000 35000 Aftertax salvage Value 40000 Cash flows 525000 129200 129200 129200 129200 204200 10 79 IRR pv 10 1 0 9091 0 8264 0 7513 0 683 0 6209 present value $ (525,000 00) $ 117,455 72 $ 106,770 88 $ 97,067 96 $ 88,243 60 $ 126,787 78 $ 11,325 94 NPV Depreciation 90000 (490000 40000) 5 10 What is the net present value of this project (list your setups) WACC 11 11 year 0 1 2 3 4 5 savings 146000 146000 146000 146000 146000 depreciation 90000 90000 90000 90000 90000 EBIT 56000 56000 56000 56000 56000 tax 30 16800 16800 16800 16800 16800 EAT 39200 39200 39200 39200 39200 depreciation 90000 90000 90000 90000 90000 Operating Cash Flows 129200 129200 129200 129200 129200 cost 490000 NWC 35000 35000 Aftertax salvage Value 40000 Cash flows 525000 129200 129200 129200 129200 204200 10 79 IRR pv 10 1 0 9091 0 8264 0 7513 0 683 0 6209 present value $ (525,000 00) $ 117,455 72 $ 106,770 88 $ 97,067 96 $ 88,243 60 $ 126,787 78 $ 11,325 94 NPV Depreciation 90000 (490000 40000) 5 11 What is the IRR of this project (list your setups) WACC 11 11 year 0 1 2 3 4 5 savings 146000 146000 146000 146000 146000 depreciation 90000 90000 90000 90000 90000 EBIT 56000 56000 56000 56000 56000 tax 30 16800 16800 16800 16800 16800 EAT 39200 39200 39200 39200 39200 depreciation 90000 90000 90000 90000 90000 Operating Cash Flows 129200 129200 129200 129200 129200 cost 490000 NWC 35000 35000 Aftertax salvage Value 40000 Cash flows 525000 129200 129200 129200 129200 204200 10 79 IRR pv 10 1 0 9091 0 8264 0 7513 0 683 0 6209 present value $ (525,000 00) $ 117,455 72 $ 106,770 88 $ 97,067 96 $ 88,243 60 $ 126,787 78 $ 11,325 94 NPV Depreciation 90000 (490000 40000) 5

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jun 25, 2024

Suppose Blue Thumb Tools is considering the introduction of a new, heavier hammer to be used for driving spikes. The new hammer will cost $490,000.

Suppose Blue Thumb Tools is considering the introduction of a new, heavier hammer to be used for driving spikes. The new hammer will cost $490,000. The cost will be depreciated straight-line to zero over the projects five-year life, at the end of which the new hammer can be scrapped for $40,000. The new hammer will save the firm $146,000 per year in pretax operating costs, and it required an initial investment in net working capital of $35,000. The tax rate of the firm is 30%. What are the cash flows of firms new project (using a time line)?WACC 11.11%

year	0	1	2	3	4	5
savings	146000	146000	146000	146000	146000
depreciation	90000	90000	90000	90000	90000
EBIT	56000	56000	56000	56000	56000
tax@30%	16800	16800	16800	16800	16800
EAT	39200	39200	39200	39200	39200
depreciation	90000	90000	90000	90000	90000
Operating Cash Flows	129200	129200	129200	129200	129200
cost	-490000
NWC	-35000	35000
Aftertax salvage Value	40000
Cash flows	-525000	129200	129200	129200	129200	204200	10.79% IRR
pv@10%	1	0.9091	0.8264	0.7513	0.683	0.6209
present value	$ (525,000.00)	$ 117,455.72	$ 106,770.88	$ 97,067.96	$ 88,243.60	$ 126,787.78	$ 11,325.94	NPV
Depreciation	90000	.=(490000-40000)/5

10. What is the net present value of this project (list your setups)? WACC 11.11%

year	0	1	2	3	4	5
savings	146000	146000	146000	146000	146000
depreciation	90000	90000	90000	90000	90000
EBIT	56000	56000	56000	56000	56000
tax@30%	16800	16800	16800	16800	16800
EAT	39200	39200	39200	39200	39200
depreciation	90000	90000	90000	90000	90000
Operating Cash Flows	129200	129200	129200	129200	129200
cost	-490000
NWC	-35000	35000
Aftertax salvage Value	40000
Cash flows	-525000	129200	129200	129200	129200	204200		10.79% IRR
pv@10%	1	0.9091	0.8264	0.7513	0.683	0.6209
present value	$ (525,000.00)	$ 117,455.72	$ 106,770.88	$ 97,067.96	$ 88,243.60	$ 126,787.78	$ 11,325.94	NPV
Depreciation	90000	.=(490000-40000)/5

11. What is the IRR of this project (list your setups)? WACC 11.11%

year	0	1	2	3	4	5
savings	146000	146000	146000	146000	146000
depreciation	90000	90000	90000	90000	90000
EBIT	56000	56000	56000	56000	56000
tax@30%	16800	16800	16800	16800	16800
EAT	39200	39200	39200	39200	39200
depreciation	90000	90000	90000	90000	90000
Operating Cash Flows	129200	129200	129200	129200	129200
cost	-490000
NWC	-35000	35000
Aftertax salvage Value	40000
Cash flows	-525000	129200	129200	129200	129200	204200		10.79% IRR
pv@10%	1	0.9091	0.8264	0.7513	0.683	0.6209
present value	$ (525,000.00)	$ 117,455.72	$ 106,770.88	$ 97,067.96	$ 88,243.60	$ 126,787.78	$ 11,325.94	NPV
Depreciation	90000	.=(490000-40000)/5