Chemical engineers at a Coleman Industries plant in the Midwest have determined that a small amount of a newly available chemical additive will increase the water repellency of Coleman’s tent fabric by 20%. The plant superintendent has arranged to purchase the additive through a 5-year contract at $7,000 per year, starting 1 year from now. He expects the annual price to increase by 12% per year thereafter for the next 8 years. Additionally, an initial investment of $35,000 was made now to prepare a site suitable for the contractor to deliver the additive. Use i=15% per year to determine the equivalent total present worth for all these cash flows.

Chemical engineers at a Coleman Industries plant in the Midwest have determined that a small amount of a newly available chemical additive will increase the water repellency of Coleman’s tent fabric by 20%. The plant superintendent has arranged to purchase the additive through a 5-year contract at $7,000 per year, starting 1 year from now. He expects the annual price to increase by 12% per year thereafter for the next 8 years. Additionally, an initial investment of $35,000 was made now to prepare a site suitable for the contractor to deliver the additive. Use i=15% per year to determine the equivalent total present worth for all these cash flows.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 14P

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Chemical engineers at a Coleman Industries plant in the Midwest have determined that a small amount of a newly available chemical additive will increase the water repellency of Coleman’s tent fabric by 20%. The plant superintendent has arranged to purchase the additive through a 5-year contract at $7000 per year, starting 1 year from now. He expects the annual price to increase by 12% per year starting in the sixth year and thereafter through year 13. Additionally, an initial investment of $35,000 was made now to prepare a site suitable for the contractor to deliver the additive. Use i = 15%per year to determine the equivalent total present worth for all these cash flows.
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United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use of an existing warehouse, which is currently rented out to a neighboring firm. The next year’s rental charge on the warehouse is $105,000, and thereafter, the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.23 million. This could be depreciated for tax purposes straight-line over 10 years. However, Pigpen expects to terminate the project at the end of 8 years and to resell the plant and equipment in year 8 for $410,000. Finally, the project requires an immediate investment in working capital of $355,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year 1 sales of hog feed are expected to be $4.30 million, and thereafter, sales are forecasted to grow by 5% a year, slightly faster than the inflation rate. Manufacturing costs…
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An oil refinery finds that it is necessary to treat the waste liquids from a new process before discharging them into a stream. The treatment will cost $30,000 the first year, but process improvements will allow the costs to decline by $3,000 each year. As an alternative, an outside company will process the wastes for the fixed price of $15,000/year throughout the 10-year period, payable at the beginning of each year. Either way, there is no need to treat the wastes after 10 years. Use the annual worth method to determine how the wastes should be processed. The company’s MARR is 10%.
Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $6,000,000 to buy the machine and $20,000 to have it delivered and installed Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to raise gross profits by $3,000,000 per year, starting at the end of the first year, with associated costs of $1 million for each of those years. The machine is expected to have a working life of six years and will be depreciated over those six years. The marginal tax rate is 20%. What are the incremental free cash flows associated with the new machine in year 0? OA-$6,000,000 OB. -$8,118,000 C. $1,003,333 OD. -$9.020,000
Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $7,000,000 to buy the machine and $15,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to raise gross profits by $4,000,000 per year, starting at the end of the first year, with associated costs of $1 million for each of those years. The machine is expected to have a working life of five years and will be depreciated over those five years. The marginal tax-rate is 20%. What are the incremental free cash flows associated with the new machine in year 2? A. $1,597,000 B. $1,403,000 C. $1,397,000 O D. $2,680,600
United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use of an existing warehouse, which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $120,000, and thereafter, the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.32 million. This could be depreciated for tax purposes straight-line over 10 years. However, Pigpen expects to terminate the project at the end of 8 years and to resell the plant and equipment in year 8 for $440,000. Finally, the project requires an immediate investment in working capital of $370,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year 1 sales of hog feed are expected to be $4.60 million, and thereafter, sales are forecasted to grow by 5% a year, slightly faster than the inflation rate. Manufacturing costs…
United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use of an existing warehouse, which is currently rented out to a neighboring firm. The next year’s rental charge on the warehouse is $195,000, and thereafter, the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.77 million. This could be depreciated for tax purposes straight-line over 10 years. However, Pigpen expects to terminate the project at the end of 8 years and to resell the plant and equipment in year 8 for $590,000. Finally, the project requires an immediate investment in working capital of $445,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year 1 sales of hog feed are expected to be $6.10 million, and thereafter, sales are forecasted to grow by 5% a year, slightly faster than the inflation rate. Manufacturing costs…