UNIT 3: CASH FLOW ESTIMATION a) Adler is replacing its old packing line with a more efficient line. The old line was being depreciated on a straight-line basis at a rate of $20,000 per year. The old machine has a current book value of $100,000. The new line, which costs $910,000, will be depreciated on a 10year MACRS schedule. The more efficient operation is expected to increase revenues by $50,000 per year and reduce annual operating costs by $80,000. Compute the net cash flows for Adler in year 2. Assume Adler has a marginal tax rate of 40%. Use the rounded MACRS schedule li sted below: (10- Year Depreciation Schedule: 10%,18%,14%,12%,9%,7%,7%,7%,7%,6%,3%) (2 marks) b) Kaneb is evaluating two alternative pipeline welders. Welder A costs $310,000, has a 7 -year life, and is expected to generate net cash inflows of $78,000 in each of the 7 years. Welder B costs $320,000, has a 5 -year life, and is expected to generate annual net cash inflows of $68,900 in each of the 5 years. Kaneb's cost of capital is 16%. U sing the equivalent annual annuity method, which alternative should be chosen and what is its N PV? (2 marks) c) Dorati Inc. is considering two mutually exclusive projects. Dorati used a 15% required rate of return to evaluate capital expenditure projects. Assuming the two projects have the costs and cash flows shown below, determine the NPV for each using a replacement chain. Assume in two years Project S will still cost $70,000 and produce the same two years of cas h flows. (2 marks) Find the IRR (using 6%&8% or 10% \& 11% ) of an investment having initial cash outflow of $3,000. The cash inflows during the first, second, third and fourth years are expected to be $700,$800,$900 and $1,200 respectively (2 marks UNIT 3: CASH FLOW ESTIMATION a) Adler is replacing its old packing line with a more efficient line. The old line was being depreciated on a straight-line basis at a rate of $20,000 per year. The old machine has a current book value of $100,000. The new line, which costs $910,000, will be depreciated on a 10year MACRS schedule. The more efficient operation is expected to increase revenues by $50,000 per year and reduce annual operating costs by $80,000. Compute the net cash flows for Adler in year 2. Assume Adler has a marginal tax rate of 40%. Use the rounded MACRS schedule li sted below: (10- Year Depreciation Schedule: 10%,18%,14%,12%,9%,7%,7%,7%,7%,6%,3%) (2 marks) b) Kaneb is evaluating two alternative pipeline welders. Welder A costs $310,000, has a 7 -year life, and is expected to generate net cash inflows of $78,000 in each of the 7 years. Welder B costs $320,000, has a 5 -year life, and is expected to generate annual net cash inflows of $68,900 in each of the 5 years. Kaneb's cost of capital is 16%. U sing the equivalent annual annuity method, which alternative should be chosen and what is its N PV? (2 marks) c) Dorati Inc. is considering two mutually exclusive projects. Dorati used a 15% required rate of return to evaluate capital expenditure projects. Assuming the two projects have the costs and cash flows shown below, determine the NPV for each using a replacement chain. Assume in two years Project S will still cost $70,000 and produce the same two years of cas h flows. (2 marks) Find the IRR (using 6%&8% or 10% \& 11% ) of an investment having initial cash outflow of $3,000. The cash inflows during the first, second, third and fourth years are expected to be $700,$800,$900 and $1,200 respectively (2 marks
