Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Transcribed Image Text:A proposed cost-saving device has an installed cost of $560,000. It is in Class 8 (CCA rate = 20%) for CCA purposes It will actually
function for five years, at which time it will have no value. There are no working capital consequences from the investment, and the tax
rate is 35%.
a What must the pre-tax cost savings be for us to favour the investment? We require an 12% return. (Hint This one is a variation on the
problem of setting a bid price.) (Do not round your intermediate calculations. Round the final answer to 2 decimal pleces. Omit S
sign in your response.)
Cost savings
b. Suppose the device will be worth $80.000 in salvage (before taxes). How does this change your answer? (Do not round your
intermediate calculations. Round the final answer to 2 decimal pieces. Omit S sign in your response.)
Cost savings
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- Need help with entire problem.arrow_forwardConsider a project with a 3-year life and no salvage value. The initial cost to set up the project is $100,000. This amount is to be linearly depreciated to zero over the life of the project. The price per unit is $90, variable costs are $72 per unit and fixed costs are $10,000 per year. The project has a required return of 12%. Ignore taxes. 1. How many units must be sold for the project to achieve accounting break-even? 2. How many units must be sold for the project to achieve cash break-even? 3. How many units must be sold for the project to achieve financial break-even? 4. What is the degree of operating leverage at the financial break-even?arrow_forwardYou are considering a new product launch. The project will cost $1.675 million, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 195 units per year; price per unit will be $16,300; variable cost per unit will be $9,400; and fixed costs will be $550,000 per year. The required return on the project is 12 percent and the relevant tax rate is 21 percent. a. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given above are probably accurate to within ±10 percent. What are the upper and lower bounds for these projections? What is the base-case NPV? What are the best-case and worst-case scenarios? (A negative answer should be Indicated by a minus sign. Do not round Intermediate calculations and round your NPV answers to 2 decimal places, e.g., 32.16.) Scenario Upper bound Lower bound Unit sales 214 175 units Variable cost per unit $ 10,340 $ 8,480 Fixed costs $ 605,000 $ 495,000 Scenario…arrow_forward
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