A new engineer at a sand and gravel operation is considering two mutually exclusive alternatives fora small dredging system. The first option from the Diggemup Corporation would cost $-122,208,have a salvage value of $14,279, and net $30,502 per year in net annual profits. The second optionfrom the Pushmoore Mudd Group would cost $-179,722, have a salvage value of $19,831, and net$34,414 per year in net annual profits. The net profit is listed after operating and maintenance costs.Due to rough service conditions, both systems would be expected to have a service life of only 5years. The corporate minimum rate of return for expenditures is 15%.Determine the incremental NPV between these two alternatives. Use the standard convention ofconsidering the highest capital project first use the correct sign in your final answer.

The company evaluates the cash generated by each project when the company has two alternative…

Answered: A new engineer at a sand and gravel…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Rust Industrial Systems is trying to decide between two different conveyor belt systems. System A costs $260,000, has a four-year life, and requires $80,000 in pretax annual operating costs. System B costs $366,000, has a six-year life, and requires $74,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Suppose the company always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 25 percent and the discount rate is 9 percent. Calculate the EAC for both conveyor belt systems. Note: Your answers should be negative values and indicated by minus signs. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. Answer is complete but not entirely correct. System A $ 38,562.29 X System B $ 25,802.08 x Which conveyor belt system should the firm choose? System A System B
Outdoor Sports is considering adding a putt-putt golf course to its facility. The course would cost $168,000, would be depreciated on a straight-line basis over its 4-year life, and would have a zero salvage value. The sales would be $90,300 a year, with variable costs of $27,450 and fixed costs of $12,050. In addition, the firm anticipates an additional $15,700 in revenue from its existing facilities if the putt putt course is added. The project will require $2,650 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 11 percent and a tax rate of 21 percent?
Bha
You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $100,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $28,000. The equipment would require a $12,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $22,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%. What is the initial investment outlay for the spectrometer after bonus depreciation is considered, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar. What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.
You are a financial analyst employed by the Arlo Construction Company. Arlo Construction is considering submitting a bid to construct a facility for a golf club and has asked you about the feasibility of constructing the facility. The investment in fixed assets necessary will require $318,000 and be depreciated straight-line to zero over the 6-year life of the project with no salvage value. Annual cash costs associated with the project are estimated to be $198,200. Arlo Construction has an effective tax rate of 35 percent. Suppose Arlo requires annual operating cash flows of $92,000.
Chadron Sports is considering adding a miniature golf course to its facility. The course would cost $138,000, would be depreciated on a straight-line basis over its five-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $72,000 a year with $24,000 of that amount being variable cost. The fixed cost would be $11,600. In addition, the firm anticipates an additional $14,000 in revenue from its existing facilities if the golf course is added. The project will require $7,000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 12 percent and a tax rate of 34 percent? O $14,438.78 $12,708.48 O $11,757.49 O $10,631.16 O $14,900.41
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Rust Industrial Systems 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. Suppose the company always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 24 percent and the discount rate is 8 percent. Calculate the EAC for both conveyor belt systems. Note: Your answers should be negative values and indicated by minus signs. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. System A System B Which conveyor belt system should the firm choose? System A System B
After discovering a new silver vein in the X Mountains, BHP Mining Corporation must decidewhether to go ahead and develop the deposit. The most cost effective method of mining silver issulfuric acid extraction, a process that could result in environmental damage. Before proceedingwith the extraction, BHP must spend $1,000,000 for new mining equipment and pay $165,000for its installation. The silver mined will net the firm an estimated $350,000 each year for the 5-year life of the vein. BHP’s cost of capital is 13%. For the purposes of this problem, assume thatthe cash inflows occur at the end of the year.Requirement:a. What are the project’s NPV and IRR?b. Should this project be undertaken if environmental impacts were not a consideration?
4. What is correct answer?
Abbott Mining Systems wants to determine whether it should upgrade a piece of equipment used in deep mining operations in one of its international operations now or later. If the com- pany selects plan A, the upgrade will be purchased now for $200,000. However, if the com- pany selects plan 1, the purchase will be deferred for 3 years when the cost is expected to rise to $300,000. Abbott is ambitious; it expects a real MARR of 12% per year. The inflation rate in the country has averaged 3% per year. From only an economic perspective, determine whether the company should purchase now or later (a) when inflation is not considered and (b) when inflation is considered.
Rust Industrial Systems Company is trying to decide between two different conveyor belt systems. System A costs $350,000, has a 4-year life, and requires $141,000 in pretax annual operating costs. System B costs $430,000, has a 6-year life, and requires $135,000 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 project is chosen, it will not be replaced when it wears out. The tax rate is 22 percent and the discount rate is 8 percent. Calculate the NPV for both conveyor belt systems. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) System A System B Which conveyor belt system should the firm choose? ○ System B O System A

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