Better 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, but, in fact, it can be sold after 6 years for $584,000. 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 $1.30 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 10%. Year: Sales (millions of traps) 0 0 Increase in NPV 0.6 million 0.7 0.8 4 0.8 5 0.7 6 0.4 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? Note: Do not round your intermediate calculations. Enter your answer in millions rounded to 4 decimal places. Thereafter 9

Better 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, but, in fact, it can be sold after 6 years for $584,000. 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 $1.30 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 10%. Year: Sales (millions of traps) 0 0 Increase in NPV 0.6 million 0.7 0.8 4 0.8 5 0.7 6 0.4 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? Note: Do not round your intermediate calculations. Enter your answer in millions rounded to 4 decimal places. Thereafter 9

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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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.
Turner 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 )= years
Better 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…
A company is considering expanding a factory. The expansion requires 400 MUSD investment immediately. It should generate 117 MUSD tax adjusted cash flow each year for 7 years. The factory can be scrapped for 360 at the end of its lifetime. The firm's cost c capital is 19%. 1. Compute the NPV of the project. MUSD 2. Compute the projects Profitability Index. Answer: 3. Estimate the Discounted Payback Period (0 means it doesn't break even): 4. Estimate the Break-Even Period (0 means it doesn't break even):
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 ?
Johnson Chemicals is considering an investment project. The project requires an initial P3 million outlay for equipment and machinery. Sales are projected to be P1.5 million per year for the next four years. The equipment will be fully depreciated straight- line by the end of year 4. Cost of goods sold and operating expense (not including depreciation) are predicted to be 30% of sales. The equipment can be sold for P400,000 at the end of year 4. Johnson Chemicals also needs to add net working capital of P100,000 immediately. The net working capital will be recovered in full at the end of the fourth year. Assume the tax rate is 40% and the cost of capital is 10%. What is the NPV of this investment?
Highlander Inc. is developiing a new ice cream flavor, Coffee & Cigarettes. You estimate that Highlander will sell 7,000 giant containers per year at a price of $2,500 per container. Production machinery will have to be purchased at a cost of $2 million. The machine will be depreciated over five years using the straight-line method. In Year O, net working capital of $1.9 million will also required to finance this project. The annual cash expenses for this project are $1,700 per laptop. The firm's tax rate is 40%. Compute the net cash inflows from operations in Year 1 O $3,040,000 O $4,560,000 O $3,520,000 O $4,080,000 O Cannot be computed
eEgg 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…
Better 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 0.5
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?
Rawr Chemicals is considering an investment project. The project requires an initial P3 million outlay for equipment and machinery. Sales are projected to be P1.5 million per year for the next four years. The equipment will be fully depreciated straight-line by the end of year 4. Cost of goods sold and operating expense (not including depreciation) are predicted to be 40% of sales. The equipment can be sold for P400,000 at the end of year 4. Rawr Chemicals also needs to add net working capital of P100,000 immediately. The net working capital will be recovered in full at the end of the fourth year. Assume the tax rate is 40% and the cost of capital is 10%. What is the NPV of this investment?
Better 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?

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