| What is the NPV of the project? | Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.85 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,130,000 in annual sales, with costs of $825,000. The tax rate is 34 percent and the required return is 11 percent. The project requires an initial investment in net working capital of $350,000, and the fixed asset will have a market value of $235,000 at the end of the project. | | What is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.) | | Years | Cash Flow | | Year 0 | $ | | Year 1 | $ | | Year 2 | $ | | Year 3 | $ | | | | What is the NPV? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) | | Your firm is contemplating the purchase of a new $555,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $55,000 at the end of that time. You will save $285,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $70,000 (this is a one-time reduction). If the tax rate is 35 percent, what is the IRR for this project? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16)) | | An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $6,200,000 and will be sold for $1,400,000 at the end of the project. If the tax rate is 30 percent, what is the aftertax salvage value of the asset? Refer to MACRS schedule (Do not round intermediate calculations and round your answer to 2 decimal places. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) | | You are evaluating two different silicon wafer milling machines. The Techron I costs $216,000, has a three-year life, and has pretax operating costs of $55,000 per year. The Techron II costs $380,000, has a five-year life, and has pretax operating costs of $28,000 per year. For both milling machines, use straight-line depreciation to zero over the projects life and assume a salvage value of $32,000. If your tax rate is 35 percent and your discount rate is 10 percent, compute the EAC for both machines. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) | | | EAC | | Techron I | $ | | Techron II | $ | | | | Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $276,000, has a four-year life, and requires $84,000 in pretax annual operating costs. System B costs $390,000, has a six-year life, and requires $78,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 34 percent and the discount rate is 8 percent. | | Calculate the NPV for both conveyor belt systems. (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16). Negative amounts should be indicated by a minus sign.) | | | NPV | | System A | $ | | System B | $ | | | | Which system should the firm choose? | | | | | | Consider the following cash flows on two mutually exclusive projects: | | Year | Project A | Project B | | 0 | $ | 52,000 | $ | 67,000 | | 1 | | 32,000 | | 31,000 | | 2 | | 27,000 | | 40,000 | | 3 | | 22,000 | | 43,000 | | | | The cash flows of project A are expressed in real terms, whereas those of project B are expressed in nominal terms. The appropriate nominal discount rate is 12 percent and the inflation rate is 3 percent. | | Calculate the NPV for each project. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) | | | NPV | | Project A | $ | | Project B | $ | | | | Which project should you choose? | | | | | | Sparkling Water, Inc., expects to sell 2.81 million bottles of drinking water each year in perpetuity. This year each bottle will sell for $1.30 in real terms and will cost $.91 in real terms. Sales income and costs occur at year-end. Revenues will rise at a real rate of 5 percent annually, while real costs will rise at a real rate of 4 percent annually. The real discount rate is 11 percent. The corporate tax rate is 35 percent. | | What is Sparkling worth today? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) | 5 | Etonic Inc. is considering an investment of $385,000 in an asset with an economic life of 5 years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $265,000 and $90,000, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 3 percent. Etonic will use the straight-line method to depreciate its asset to zero over five years. The salvage value of the asset is estimated to be $65,000 in nominal terms at that time. The one-time net working capital investment of $20,000 is required immediately and will be recovered at the end of the project. All corporate cash flows are subject to a 34 percent tax rate. | | What is the projects total nominal cash flow from assets for each year? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.) | | | Cash flow | | Year 0 | $ | | Year 1 | $ | | Year 2 | $ | | Year 3 | $ | | Year 4 | $ | | Year 5 | $ | |
