the order and i so, whal Bene Builder Supply, a retailer in the home improvement ates seven retail outlets in Georgia and South Carolina. Manageme plating building an eighth retail store across town from its m retail has an t spent demand for the its most outlet. The company alrealy owns the land for this store, whictspe ahandoned warehouse located on it. Last month, the marketing departime the $10,000 on market research to determine the extent of customer build and open new store. Now Home Builder Supply must decide whether to build a for new store Which of the folowing should be included as part of the incremental earnings the proposed new retail store? a. The original purchase price of the land where the store will be located b. The cost of demolishing the ahundoned warehouse and clearing the lot. The loss of sales in the existing retail outlet, if customers who previously drov new store across town to shop at the existing outlet become customers of the instead d. The $10,000 in market research spent to evaluate customer demand. e. Construction costs for the new store The valve of the land if sold g Interest expense on the debt borrowed to pay the construction costs. 2a. if Daily Enterprises uses MACRS instcad of straight-line depreciation, which incre mental free cash flows from Problem 10 would increase and which would decrease 24 Markov Manufacturing recently spent $15 million to purchase some equipmen in the manufacture of disk drives. The firm expects that this equipment will havea useful life of five years, and its marginal corporate tax rate is 35%. The company plans to use straight-line depreciation. a. What is the annual depreciation expense associated with this equipment? b. What is the annual depreciation tax shield? c. Rather than straight-line depreciation, suppose Markov will use the MACRS depre- ciation method for the five-year life of the property. Calculate the depreciation tax shield each year for this equipment under this accelerated depreciation schedule. d. If Markov has a choice between straight-line and MACRS depreciation schedules, and its marginal corporate tax rate is expected to remain constant, which schedule should it choose? Why? e. How might your answer to part (d) change if Markov anticipates that its marginal corporate tax rate will increase substantially over the next five years? 25. Your company has been doing well, reaching $1 million in earnings, and is consider- ing launching a new product. Designing the new product has already cost $500,000. The company estimates that it weill ell 800,000 units per year for $3 per unit and vari- able non-labor costs will be S1 per unit. Production will end after year 3. New equip- ment costing S1 million will be required. The equipment will be depreciated to zero using the 7 year MACRS schedule. You plan to sell the equipment for book value at Chapter 9 Fundamentals of Capital Budgeting321 the end of year 3. Your current level of working capital is $300,000. The new product will require the working capital to increase to a level of $380,000 immediately, then to $400,000 in year 1, in year 2 the level will be $350,000, and finally in year 3 the level will return to $300,000. Your tax rate is 35%. The discount rate for this project is 10%. Do the capital budgeting analysis for this project and calculate its NPV 26. You work for Apple. After toiling away on $10 million worth of prototypes, you have finally produced your answer to Google Glasses: iGlasses (the name alone is genius). iGlasses will instantly transport the wearer into the world as Apple wants you to experience it: iTunes with the wink of an eye and apps that can be activated just by looking at them. You think that these will sell for 5 years until the next big thing comes along (or until users are unable to interact with actual human beings). Rev- enues are projected to be $450 million per year along with expenses of $350 million. You will need to spend $60 million immediately on additional equipment that ill be depreciated using the 5-year MACRS schedule. Additionally, you will use some fully depreciated existing equipment that has a market value of $10 million. As iGlasses are an outcome of the R&D center, Apple plans to charge $5 million of the annual costs of the center to the iGlasses product for 5 years. Finally, Apple's working capital levels will increase from their current level of $120 million to $140 million imme diately. They weill remain at the elevated level until year 5, when they will return to $120 million. Apple's discount rate for this project is 15% and its tax rate is 35% Calculate the free cash flows and determine the NPV of this project. 27. After spending $10,000 on client level pment, you havejust been offered a big pro duction contract by a new client. The contract will add $200,000 to your revenues for each of the next 5 years and it will cost you $100,000 per year to make the additional product. You will have to use some existing equipment and buy new equipment as well. The existing equipment is fully depreciated, but could be sold for $50,000 now If you use it in the project,it will be worthless at the end of the project. You will buy new equipment valued at $30,000 and use the 5-year MACRS schedule to depreciate it. It will be worthless at the end of the project. Your current production manager earns $80,000 per year. Since she is busy with ongoing projects, you are planning to hire an assistant at $40,000 per year to help with the expansion. You will have to increase your inventory immediately from $20,000 to $30,000.It will return to $20,000 at the end of the project. Your company's tax rate is 35% and your discount rate is 15% What is the NPV of the contract