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Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $22,000, whereas the gas-powered truck will cost $17,500. The cost of capital that applies to both investments is 12%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,290 per year, and those for the gas-powered truck will be $5,000 per year. Annual net cash flows include
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- Blossom Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the Option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life. The following estimates were made of the cash flows. The company's cost of capital is 5%. Option A Option B Initial cost $183,000 $281,000 Annual cash inflows $70,000 $80,000 Annual cash outflows $28,000 $25,000 Cost to rebuild (end of year 4) $48,000 $0 Salvage value $0 $7,000 Estimated useful life 7 years 7 yearsTrader Bubba Industries must choose between solar and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The solar truck will cost more but will be less expensive to operate; it will cost $70,000, whereas the electric-powered truck will cost $60,000. The life for both types of truck is estimated to be 8 years, during which time the net cash flows for the solar-powered truck will be $20,000 per year and those for the electric-powered truck will be $12,000 per year. Trader Bubba Industries’ assets are $400 million, financed through bank loans, bonds, preferred stocks, and common stocks. The amounts are as follows: Bank loans: $50 million borrowed at 6% Bonds: $200 million, paying 8% coupon with semi-annual payments, and maturity of 10 years. Trader Bubba sold its $1,000 par-value bonds for $1020 and had to incur $20 flotation cost per bond.…Kim Inc. must install a new air conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly profitable plant would have to shut down. Two units are available, HCC and LCC (for high and low capital costs, respectively). HCC has a high capital cost but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it uses more electricity. The costs of the units are shown here. Kim's WACC is 6%. 1 2 3 4 НСС -$600,000 -$45,000 -$45,000 -$45,000 -$45,000 -$45,000 LCC -$90,000 -$175,000 -$175,000 -$175,000 -$175,000 -$175,000 a. Which unit would you recommend? I. Since all of the cash flows are negative, the IRR's will be negative and we do not accept any project that has a negative IRR. II. Since all of the cash flows are negative, the NPV's cannot be calculated and an alternative method must be employed. III. Since all of the cash flows are negative, the NPV's will be negative and we do not accept any…
- Ruby is looking at the results of a Capital Investment Appraisal. The report shows that, assuming a Cost of Capital of 10%, investing in a plant to manufacture a new clothing line would give a positive NPV and an IRR of 23%. Should the company buy the machine? NPV is positive and IRR is less than the Cost of Capital NPV is positive and IRR exceeds Cost of Capital. NPV does not provide enough information. IRR is higher than the Cost of CapitalCarla Vista Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the Option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life. The following estimates were made of the cash flows. The company's cost of capital is 5%. Option A Option B Initial cost $194,000 $291,000 Annual cash inflows $72,600 $82,000 Annual cash outflows $28,100 $25,100 Cost to rebuild (end of year 4) $51,200 $0 Salvage value $0 $9,000 Estimated useful life 7 years 7 years Click here to view the factor table. (a) Your answer is partially correct. Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint: To solve for internal rate of return, experiment with…Evans Industries wishes to select the best of three possible machines, each of which is expected to satisfy the firm's ongoing need for additional aluminum-extrusion capacity. The three machines—A, B, and C—are equally risky. The firm plans to use a cost of capital of 11.7% to evaluate each of them. The initial investment and annual cash inflows over the life of each machine are shown in the following table. Machine A MachineB Machine C Initial investment 91,900 64,700 100,200 Year Cash inflows 1 11,000 10,200 30,500 2 11,000 19,900 30,500 3 11,000 30,200 30,500 4 11,000 39,500 30,500 5…
- The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost but low annual operating costs and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 12%, and the projects' expected net costs are listed in the following table: a. What is the IRR of each alternative? The IRR of alternative 1 is -Select- Year 0 1 2 3 4 5 -Select- Expected Net Cost Forklift -$200,000 -160,000 -160,000 -160,000 -160,000 -160,000 Conveyor -$500,000 -120,000 -120,000 -120,000 -120,000 -20,000 The IRR of alternative 2 is-Select- b. What is the present value of costs of each alternative? Do not round Intermediate calculations. Round your answers to the nearest…Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the Option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life. The following estimates were made of the cash flows. The company's cost of capital is 5%. Option A Option B Initial cost $193.000 $285,000 Annual cash inflows $72,900 $82.500 Annual cash outflows $28,700 $26,700 Cost to rebuild (end of year 4) $50.700 S0 Salvage value SO $7.700 Estimated useful life 7 years 7 years Click here to view PV table. (a) Compute the (1) net present value, (2) profitability index and (3) Internal rate of return for each option. (HintE To solve for internal rate of return, experiment with alternative discount rates to arrive at a net…Isaac Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. The firm will choose only one because both forklifts perform the same function. (They are mutually exclusive investments.) The electric-powered truck will cost more but will be less expensive to operate; it will cost $22,000, whereas the gas-powered truck will cost $17,500. The cost of capital that applies to both investments is 18%. The life for both types of truck is estimated to be six years, during which time the net cash flows for the electric-powered truck will be $7,290 per year, and those for the gas-powered truck will be $6,000 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck and decide which to recommend. Compute the NPV for each truck. Compute the IRR for each truck. Compute the crossover rate. Compute the payback period for each truck. Compute the profitability index for each truck.
- Dune Ltd is considering a project that will require the use of a crane that cost £600,000 when it was acquired four years ago and which has a current carrying amount (statement of financial position value) of £370,000. If the project is not undertaken, the crane could be sold for £180,000 or it could be used for another project. If it is used for the other project, the business will not have to purchase another crane for £250,000. The business uses the net present value (NPV) method to appraise investment projects. What is the relevant cost of the machine when calculating the NPV of the project? O a. £180,000 O b. £370,000 O c. £780,000 O d. £250,000 e. £600,000Bauer Industries is an automobile manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight trucks. Bauer plans to use a cost of capital of 11.7% to evaluate this project. Based on extensive research, it has prepared the following incremental free cash flow projections (in millions of dollars): a. For this base-case scenario, what is the NPV of the plant to manufacture lightweight trucks? b. Based on input from the marketing department, Bauer is uncertain about its revenue forecast. In particular, management would like to examine the sensitivity of the NPV to the revenue assumptions. What is the NPV of this project if revenues are 8% higher than forecast? What is the NPV if revenues are 8% lower than forecast? c. Rather than assuming that cash flows for this project are constant, management would like to explore the sensitivity of its analysis to possible growth in revenues and operating expenses. Specifically, management would like…
