Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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- FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $189,000 per year. Once in production, the bike is expected to make $283,500 per year for 10 years. Assume the cost of capital is 10%. a. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment? b. By how much must the cost of capital estimate deviate to change the decision? (Hint: Use Excel to calculate the IRR.) c. What is the NPV of the investment if the cost of capital is 15%? Note: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.arrow_forwardTurner Hardware is adding a new product line that will require an investment of $1,530,000. Managers estimate that this investment will have a 10-year life and generate net cash inflows of $320,000 the first year, $265,000 the second year, and $230,000 each year thereafter for eight years. The investment has no residual value. Compute the payback period. First enter the formula, then calculate the payback period. (Round your answer to two decimal places.) Full years Amount to complete recovery in next year Projected cash inflow in next year )= Payback )= yearsarrow_forwardBetter Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.3 million. The equipment will be depreciated straight-line over 6 years, but, in fact, it can be sold after 6 years for $549,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year’s forecast sales. The firm estimates production costs equal to $1.60 per trap and believes that the traps can be sold for $6 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm’s tax bracket is 40%, and the required rate of return on the project is 10%. Year: 0 1 2 3 4 5 6 Thereafter Sales (millions of traps) 0 0.6 0.8 1.0 1.0 0.5 0.3 0 Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. By how much will this increase project NPV? (Do not round your intermediate…arrow_forward
- Modern Artifacts can produce keepsakes that will be sold for $76 each. Non-depreciated fixed costs are $940 per year and variable costs are $48 per unit. a. If the project requires an initial investment of $2,940 and is expected to last for 8 years and the firm pays no taxes, what are the accounting and NPV break-even levels of sales? The initial investment will be depreciated straight-line over 8 years to a final value of zero, and the discount rate is 14%. (Round your answers to the nearest whole dollar.) NPV break-even sales level is ?arrow_forwardeEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $60,000 to purchase and install and $30,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $62,000 per year. The firm’s cost of capital (discount rate) is 10%. Required: 1. What is the net present value (NPV) of the proposed investment under each of the following independent situations? (Use the appropriate present value factors from Appendix C, TABLE 1 and Appendix C, TABLE 2.) 1a. The firm is not yet profitable and therefore pays no income taxes. 1b. The firm is in the 30% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. 1c. The firm is in the 30% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB…arrow_forwardBetter Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.4 million. The equipment will be depreciated straight line over 6 years to a value of zero, but in fact it can be sold after 6 years for $668,000. The firm believes that working capital at each date must be maintained at a level of 15% of next year’s forecast sales. The firm estimates production costs equal to $1.60 per trap and believes that the traps can be sold for $6 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm’s tax bracket is 35%, and the required rate of return on the project is 9%. Use the MACRS depreciation schedule. Year: 0 1 2 3 4 5 6 Thereafter Sales (millions of traps) 0 0.5 0.7 0.8 0.8 0.7 0.5arrow_forward
- a company is considering the purchase of a new machine for 480,000. Management predicts that the machine can produce sales of 180,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling 120,000 per year including depreciation of 30,000 per year. The company's tax rate is 40%. What is the payback period for the new machine?arrow_forwardBetter Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.3 million. The equipment will be depreciated straight-line over 6 years, but, in fact, it can be sold after 6 years for $583,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year’s forecast sales. The firm estimates production costs equal to $1.10 per trap and believes that the traps can be sold for $5 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm’s tax bracket is 40%, and the required rate of return on the project is 12%. Year: 0 1 2 3 4 5 6 Thereafter Sales (millions of traps) 0 0.6 0.8 0.9 0.9 0.8 0.6 0 Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. By how much will this increase project NPV?arrow_forwardThunderbolt Corporation is considering an investment project to produce electric gadgets. Cathie Wood projected unit sales of these gadgets to be 10,000 in the first year, with growth of 6.5 percent each year over the subsequent five years (so the total project life is six years). Production of these gadgets will require $1,200,000 in net working capital to start. The net working capital will be recovered at the end of the project. Total fixed costs are $3,000,000 per year, variable production costs are $350 per unit, and the units are priced at $850 each. The equipment needed to begin production will cost $8,400,000. The equipment will be depreciated using the straight-line method over a six-year life and has a pre-tax salvage value of $520,000 when the project closes. The tax rate is 25%. a) Using Excel, set up a table that shows your detailed calculation with formulas of the project cash flows for each year throughout the life of the project.arrow_forward
- Pivot, Inc. is currently valuing a new project that has the average risk of its investment projects. The project requires upfront R&D and marketing expenses of $10 million and a $30 million investment in equipment. The equipment will be obsolete in 3 years and will be depreciated using the straight-line method over that period. For each year over the next 3 years, the project offers annual sales of $100 million, has annual manufacturing costs of $30 million, and annual operating expenses of $10 million. Further, the project requires no net working capital in year 0, and $2.0 million in net working capital in each year from year 1 to year 2 and no net working capital in year 3. Beyond year 3, the project's free cash flows are expected to growth at an annual rate of 1%. Pivot currently has 20 million outstanding shares with its stock price of $30 per share, $320 million in debt, $20 million in excess cash, the cost of debt of 5%, and the cost of equity of 10%, and the corporate tax rate…arrow_forwardLePew Cosmetics is evaluating a new fragrance-mixing machine. The machine requires an initial investment of $360000 and will generate cash inflows of $63450 per year for 8 years. If the cost of capital is 14%, calculate the net present value (NPV) and indicate whether to accept or reject the machine. The NPV of the project is $__________arrow_forwardAn investment of P270,066 is needed for a Korean Mart that will produce a uniform annual revenue. This Korean Mart is operating daily (assuming 30 days a month) for 5 years and then have a salvage value of 10% of the investment. Out-of-pocket costs for operation and maintenance will be P81,035 per year. Taxes and insurance will be 4% of the first cost per year. The company expects capital to earn not less than 25% before income taxes. Using RoR method, how much should be their minimum daily revenue for this investment to be desirable(break-even)?arrow_forward
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