Am. 112. ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $762,400.00 work cell. Further, it will cost the firm $55,700.00 to get the work cell delivered and installed. The work cell will bestraight - line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $53,300.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but hasa market value of $5,100.00. Finally, the firm will invest $10,300.00 in net working capital to ensure the project has sufficientresources to be successful. The project will generate annual sales of $911,000.00 with expenses estimated at 36.00% of sales. Networking capital will be held constant throughout the project. The tax rate is 37.00 %. The work cell is estimated to have a marketvalue of $475,000.00 at the end of the fourth year. The firm expects to reclaim 90.00% of the final NWC position. The cost of capitalis 10.00 %. What is the NPV the project if we end the project after 4 years?

To evaluate the Net Present Value (NPV) of ABC Corporation's four-year project, we must consider the…

Answered: ABC Corporation has hired you to…

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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Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to go ahead and develop the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that could result in environmental damage. Before proceeding with the extraction, CTC must spend 900,000 for new mining equipment and pay 165,000 for its installation. The mined gold will net the firm an estimated 350,000 each year for the 5-year life of the vein. CTCs cost of capital is 14%. For the purposes of this problem, assume that the cash inflows occur at the end of the year. a. What are the projects NPV and IRR? b. Should this project be undertaken if environmental impacts were not a consideration? c. How should environmental effects be considered when evaluating this or any other project? How might these concepts affect the decision in part b?
ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $769,800.00 work cell. Further, it will cost the firm $51,300.00 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $72,000.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $7,300.00. Finally, the firm will invest $11,900.00 in net working capital to ensure the project has sufficient resources to be successful. The project will generate annual sales of $920,000.00 with expenses estimated at 39.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 37.00%. The work cell is estimated to have a market value of $489,000.00 at the end of the fourth year. The firm expects to reclaim 86.00% of the…
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ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $773,300.00 work cell. Further, it will cost the firm $56,300.00 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20 -year useful life. The project will require new employees to be trained at a cost of $72,900.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $6,300.00. Finally, the firm will invest $10,400.00 in net working capital to ensure the project has sufficient resources to be successful. The project will generate annual sales of $918,000.00 with expenses estimated at 37.00% of sales. Net working capital will be held constant throughout the project. The tax rate 38.00%. The work cell is estimated to have a market value of $500,000.00 at the end of the fourth year. The firm expects to reclaim 90.00% of the…
ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $824,300.00 work cell. Further, it will cost the firm $55,600.00 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $55,100.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $6,200.00. Finally, the firm will invest $11,800.00 in net working capital to ensure the project has sufficient resources to be successful. The project will generate annual sales of $917,000.00 with expenses estimated at 40.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 37.00%. The work cell is estimated to have a market value of $499,000.00 at the end of the fourth year. The firm expects to reclaim 82.00% of the…
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