Calculating initial investment DuPree Coffee Roasters, Inc., wishes to expand and modernize its facilities. The installed cost of a proposed computer-controlled automatic-feed roaster will be $131,000. The firmhas a chance to sell its 4-year-old roaster for $35,900. The existing roaster originally cost $59,000 and was being depreciated using MACRS and a 7-year recovery period (see the table EDuPree is subject to a40% tax rate.a. What is the book value of the existing roaster?b. Calculate the after-tax proceeds of the sale of the existing roaster.c. Calculate the change in net working capital using the following figures:Anticipated Changes in Current Assets andCurrent Liabilities- $19,600+51,000AccrualsInventoryAccounts payable+ 39,800Accounts receivable+ 69,500a. The remaining book value of the existing roaster is $(Round to the nearest dollar.)

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EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 12P

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Austins cell phone manufacturer wants to upgrade their product mix to encompass an exciting new feature on their cell phone. This would require a new high-tech machine. You are excited about his new project and are recommending the purchase to your board of directors. Here is the information you have compiled in order to complete this recommendation: According to the information, the project will last 10 years and require an initial investment of $800,000, depreciated with straight-line over the life of the project until the final value is zero. The firms tax rate is 30% and the required rate of return is 12%. You believe that the variable cost and sales volume may be as much as 10% higher or lower than the initial estimate. Your boss understands the risks but asks you to explain the alternatives in a brief memo to the board, Write a memo to the Board of Directors objectively weighing out the pros and cons of this project and make your recommendation(s).
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?
The Ham and Egg Restaurant is considering an investment in a new oven that has a cost of $60,000, with annual net cash flows of $9,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether or not you would recommend that Ham and Egg invest in this oven.
Gallant Sports s considering the purchase of a new rock-climbing facility. The company estimates that the construction will require an initial outlay of $350,000. Other cash flows are estimated as follows: Assuming the company limits its analysis to four years due to economic uncertainties, determine the net present value of the rock-climbing facility. Should the company develop the facility if the required rate of return is 6%?
Average rate of returncost savings Maui Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of 125,000 with a 15,000 residual value and an eight-year life. The equipment will replace one employee who has an average wage of 28,000 per year. In addition, the equipment will have operating and energy costs of 5,150 per year. Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment.
Manzer Enterprises is considering two independent investments: A new automated materials handling system that costs 900,000 and will produce net cash inflows of 300,000 at the end of each year for the next four years. A computer-aided manufacturing system that costs 775,000 and will produce labor savings of 400,000 and 500,000 at the end of the first year and second year, respectively. Manzer has a cost of capital of 8 percent. Required: 1. Calculate the IRR for the first investment and determine if it is acceptable or not. 2. Calculate the IRR of the second investment and comment on its acceptability. Use 12 percent as the first guess. 3. What if the cash flows for the first investment are 250,000 instead of 300,000?
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial $5 million investment in net operating working capital. The company’s tax rate is 25%. What is the initial investment outlay? The company spent and expensed $150,000 on research related to the new product last year. What is the initial investment outlay? Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. What is the initial investment outlay?
Calculating initial investment DuPree Coffee Roasters, Inc., wishes to expand and modernize its facilities. The installed cost of a proposed computer-controlled automatic-feed roaster will be $127,000. The firm has a chance to sell its 3-year-old roaster for $34,900. The existing roaster originally cost $60,800 and was being depreciated using MACRS and a 7-year recovery period (see the table E). DuPree is subject to a 40% tax rate. a. What is the book value of the existing roaster? b. Calculate the after-tax proceeds of the sale of the existing roaster. c. Calculate the change in net working capital using the following figures: Data Table Anticipated Changes in Current Assets and Current Liabilities (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a -$19,000 + 50,600 + 39,200 + 70,200 Accruals spreadsheet.) Inventory Accounts payable Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes…
Ali Baba Tours is considering an investment in augmented reality (AR) technology to boost its tourism revenues The system sells for $24,586 and requires additional working capital of $4,000 its estimated useful life is five years and will have a salvage value of $1,000 in year 3, a system upgrade will also be required at a cost of $6,000, Annual incremental revenues from the purchase of the system will be $10,000 but a loss of $3,000 in contribution margin of traditional tours is also expected Incremental fixed costs associated with the system total $3,200 including depreciation of $1,400 Required: a Compute the net present value at a 14% required rate of return b. Compute the internal rate of return. C Determine the payback period of the investment d. NPV is argued to be the superior capital budgeting technique.
Calculating initial investment Vastine Medical, Inc., is considering replacing its existing computer system, which was purchased 3 years ago at a cost of $324,000. The system can be sold today for $193,000. It is being depreciated using MACRS and a 5-year recovery period (see the table LOADING... ). A new computer system will cost $498,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 40% tax rate on ordinary income and capital gains. a. Calculate the book value of the existing computer system. b. Calculate the after-tax proceeds of its sale for $193,000. c. Calculate the initial investment associated with the replacement project.
Integrative: Complete Investment decision Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.26 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $0.92 million 10 years ago, and can be sold currently for $1.15 million before taxes. As a result of acquisition of the new press, sales in each of the next 5 years are expected to be $1.66 million higher than with the existing press, but product costs (excluding depreciation) will represent 54% of sales. The new press will not affect the firm's net working capital requirements. The new press will be depreciated under MACRS using a five-year recovery period. The firm is subject to a 40% tax rate. Wells Printing's cost of capital is 11.3%. (Note: Assume that the old and the new presses will each have a terminal value of $0 at the end of year 6.) a. Determine the initial cash flow required by the new press. b.…

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