ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require thepurchase of a $823,400.00 work cell. Further, it will cost the firm $55,600.00 to get the work cell delivered andinstalled. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will requirenew employees to be trained at a cost of $68,600.00. The project will also use a piece of equipment the firmalready owns. The equipment has been fully depreciated, but has a market value of $7,100.00. Finally, the firm willinvest $11,400.00 in net working capital to ensure the project has sufficient resources to be successful.The project will generate annual sales of $905,000.00 with expenses estimated at 37.00% of sales. Net workingcapital will be held constant throughout the project. The tax rate is 38.00%.The work cell is estimated to have a market value of $493,000.00 at the end of the fourth year. The firm expects toreclaim 86.00% of the final NWC position.The cost of capital is 15.00%.What is the NPV the project if we end the project after 4 years?

NPV is also known as Net Present Value.. It is a capital budgeting technique which helps in decision…

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

See similar textbooks

Similar questions

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?
ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $803,600.00 work cell. Further, it will cost the firm $57,900.00 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 $65,200.00. 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 $5,000.00. Finally, the firm will invest $10,700.00 in net working capital to ensure the project has sufficient resources to be successful. The project will generate annual sales of $919,000.00 with expenses estimated at 39.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 40.00%. The work cell is estimated to have a market value of $450,000.00 at the end of the fourth year. The firm expects to reclaim 83.00% 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 $792,400.00 work cell. Further, it will cost the firm $59,300.00 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 $65,100.00. 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 $6,000.00. Finally, the firm will invest $10,800.00 in net working capital to ensure the project has sufficient resources to be successful. The project will generate annual sales of $901,000.00 with expenses estimated at 36.00% 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 $488,000.00 at the end of the fourth year. The firm expects to reclaim 81.00% 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 $843,200.00 work cell. Further, it will cost the firm $51,700.00 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 $59,100.00. 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 $5,200.00. Finally, the firm will invest $10,800.00 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 38.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 40.00%. 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 85.00% of the…
A consultant has recommended that you modernize a production line. Costs include $650,000 in equipment, a $10,000 investment in net working capital at the time of installation, and $5,000 in delivery and installation costs. The consultant has billed the firm for $7,500 for her analysis of the project. If the project is undertaken, an employee training program costing $8,000 would be required. The old machinery has no book value but can be sold for $100,000. Your firm's marginal tax rate is 34%. What is the initial outlay associated with the project? 619,500 612,000 570,000 578,000 607,000
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…
Cori's Meats is looking at a new sausage system with an installed cost of$304,000. This cost will be depreciated straight-line to zero over the project's five-year life, at theend of which the sausage system can be scrapped for $30,000. The sausage system will save the firm$116,000 per year in pretax operating costs and the system requires an initial investment in net workingcapital of $15,000. If the tax rate is 23 percent and the discount rate is 10 percent, what is the NPV ofthis project? Security F has an expected return of 11 percent and a standarddeviation of 47 percent per year. Security G has an expected return of 14 percent and a standarddeviation of 63 percent per year.a. What is the expected return on a portfolio composed of 65 percent of Security F and 35 percent ofSecurity G?b. If the correlation between the returns of Security F and Security G is. 15, what is the standarddeviation of the portfolio described in part (a)? One potential criticism of the internal rate of…
Raph Inc. needs someone to supply it with 1,000,000 planks of wood per year to support its manufacturing needs over the next six years, and your company has decided to bid on the contract. It will cost your firm $5,000,000 to install the equipment necessary to start production. The equipment will be depreciated using the straight-line method to 0 over the project's life. The salvage value of the equipment is expected to be 0. Your fixed costs will be $2,000,000 annually, and your variable production costs are $14 per plank. You also need an initial investment in net working capital of $ 2,000,000, which will be recovered at the end of the project. The firm has a tax rate of 21%, and the required rate of return is 10%. Calculate the bid price. (Round to 3 decimals)
Raph Inc. needs someone to supply it with 1,000,000 planks of wood per year to support its manufacturing needs over the next six years, and your company has decided to bid on the contract. It will cost your firm $5,000,000 to install the equipment necessary to start production. The equipment will be depreciated using the straight-line method to 0 over the project's life. The salvage value of the equipment is expected to be 0. Your fixed costs will be $2,000,000 annually, and your variable production costs are $14 per plank. You also need an initial investment in net working capital of $2,000,000, which will be recovered at the end of the project. The firm has a tax rate of 21%, and the required rate of return is 10%. Calculate the bid price. (Round to 3 decimals) Calculate the OCF for year 1, based on the Bid price. (Round to 2 decimals)
Consider the following financial information about a retooling project at a computer manufacturing company: The project costs $2 million and has a five-year service life. The project can be classified as a seven-year property under the MACRS rule. At the end of the fifth year, any assets held for the project will be sold. The expected salvage value will be about 10% of the initial project cost. The firm will finance 40% of the project money from an outside financial institution at an interest rate of 10%. The firm is required to repay the loan with five equal annual payments. The firm's incremental (marginal) tax rate on this investment is 35%. The firm's MARR is 18%.Use this financial information to complete the following tasks:(a) Determine the after-tax cash flows.(b) Compute the annual equivalent cost for this project.

SEE MORE QUESTIONS

Recommended textbooks for you

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Excel Applications for Accounting Principles

Accounting

ISBN:

9781111581565

Author:

Gaylord N. Smith

Publisher:

Cengage Learning

Cornerstones of Cost Management (Cornerstones Ser…

Accounting

ISBN:

9781305970663

Author:

Don R. Hansen, Maryanne M. Mowen

Publisher:

Cengage Learning

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Excel Applications for Accounting Principles

Accounting

ISBN:

9781111581565

Author:

Gaylord N. Smith

Publisher:

Cengage Learning

Cornerstones of Cost Management (Cornerstones Ser…

Accounting

ISBN:

9781305970663

Author:

Don R. Hansen, Maryanne M. Mowen

Publisher:

Cengage Learning

Fundamentals Of Financial Management, Concise Edi…

Finance

ISBN:

9781337902571

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Principles of Accounting Volume 2

Accounting

ISBN:

9781947172609

Author:

OpenStax

Publisher:

OpenStax College

SEE MORE TEXTBOOKS