Executives at Microsoft are interested to get into the drone delivery business. Since it would take them too much time to set up their own operation, they decide to acquire “Flyit” corporation. “Flyit” has been operating a drone delivery service for 4 years now, and they are the most successful operators in the market. Microsoft executives offer “Flyit” two purchase options. The first option is one $40 million lump sum payment. The second option is paying five annual payments of $10 million over the next five years. Evaluate the net present values of both option and identify which option is more cost effective for Microsoft?

Executives at Microsoft are interested to get into the drone delivery business. Since it would take them too much time to set up their own operation, they decide to acquire “Flyit” corporation. “Flyit” has been operating a drone delivery service for 4 years now, and they are the most successful operators in the market. Microsoft executives offer “Flyit” two purchase options. The first option is one $40 million lump sum payment. The second option is paying five annual payments of $10 million over the next five years. Evaluate the net present values of both option and identify which option is more cost effective for Microsoft?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 10P

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Executives at Microsoft are interested to get into the drone delivery business. Since it would take them too much time to set up their own operation, they decide to acquire “Flyit” corporation. “Flyit” has been operating a drone delivery service for 4 years now, and they are the most successful operators in the market. Microsoft executives offer “Flyit” two purchase options. The first option is one $40 million lump sum payment. The second option is paying five annual payments of $10 million over the next five years. If the annual interest rate is 7%, find the present value of both options? [Note: you are supposed to show every step of your calculation and interpret the result] ( Evaluate the net present values of both option and identify which option is more cost effective for Microsoft?
Executives at Microsoft are interested to get into the drone delivery business. Since it would take them too much time to set up their own operation, they decide to acquire “Flyit” corporation. “Flyit” has been operating a drone delivery service for 4 years now, and they are the most successful operators in the market. Microsoft executives offer “Flyit” two purchase options. The first option is one $40 million lump sum payment. The second option is paying five annual payments of $10 million over the next five years.a) If the annual interest rate is 7%, find the present value of both options? [Note: you are supposed to show every step of your calculation and interpret the result
Executives at Microsoft are interested to get into the drone delivery business.They decide to acquire "FLY" corporation."FLY" has been operating a drone delivery service for 4 years now and they are the most successful operators in the market. Microsoft executives offer "FLY" two purchase options: the first option is one $40 million lump sum payment. the second option is paying five annual payments of $10 million over the next five years. a)If the annual interest rate is 7% ,find the present value of both options? b) Evaluate the net present values of both option and identify which option is more cost effective for Microsoft ?
McCormick & Company is considering building a new factory in Largo, Maryland. James Francis, a landowner, is selling a 4.35-acre parcel of industrial zoned land with a listed sale price of $3,000,000.00 for the land. McCormick & Company is interested in the land and so is another manufacturing company. The competing manufacturing company has made an offer of $2,300,000.00 in cash and $300,000 each year for 15 years for the land. McCormick & Company knows it can make an offer to outbid the competitor to obtain the land. So, McCormick & Company decided to offer $4,424,000.00 in cash. Now, the land owner, James Francis, must make a decision between the two competing offers. To make this decision, James should first identify the Present Value (PV) of each offer. James's bank is offering a 12 percent (12%) interest rate if the competing manufacturing company borrows money to pay its annual payment. Let's help James make his decision by answering the following questions using…
McCormick & Company is considering building a new factory in Largo, Maryland. James Francis, a landowner, is selling a 4.35-acre parcel of industrial zoned land with a listed sale price of $3,000,000.00 for the land. McCormick & Company is interested in the land and so is another manufacturing company. The competing manufacturing company has made an offer of $2,300,000.00 in cash and $300,000 each year for 15 years for the land. McCormick & Company knows it can make an offer to outbid the competitor to obtain the land. So, McCormick & Company decided to offer $4,242,000.00 in cash. Now, the land owner, James Francis, must make a decision between the two competing offers. To make this decision, James should first identify the Present Value (PV) of each offer. James's bank is offering a 12 percent (12%) interest rate when invested through the bank-managed growth stock portfolios. Let's help James make his decision by answering the following questions using the template to…
The X Company is considering purchasing a business machine for $100,000. An alternative is to rent it for $35,000 at the beginning of each year. The rental would include all repairs and services. If the machine is purchased, a comparable repair and service contract can be obtainedfor $1,000 per year. The salesperson of the business machine firm has indicated that the expected useful service life of this machine is five years, with zero market value, but the company is not sure how long the machine will be needed. If the machine is rented, the company can cancel the lease at the end of any year. Assuming an income tax rate of 25%, a straight-line depreciation charge of $20,000 for each year the machine is kept, and an after-tax MARR of 10%, prepare an appropriate analysis to help the firm decide whether it is more desirable to purchase or rent.
The president of your company, MorChuck Enterprises, has asked you to evaluate the proposed acquisition of a new chromatograph for the firm's R&D department. The equipment's basic price is $80,000, and it would cost another $16,000 to modify it for special use by your firm. The chromatograph, which falls into the MACRS 3-year class, would be sold after 3 years for $34,400. The MACRS rates for the first three years are 0.3333, 0.4445 and 0.1481. (Ignore the half-year convention for the straight-line method.) Use of the equipment would require an increase in net working capital (spare parts inventory) of $3,000. The machine would have no effect on revenues, but it is expected to save the firm $30,200 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 25%. Cash outflows and negative NPV value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar. What is…
The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $40,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net operating working capital of $3,000, which would be recovered when the computer is sold. The computer would increase the firm's before-tax revenues by $20,000 per year but would also increase operating costs by $5,000 per year. The computer is expected to be used for 3 years and then be sold for $24,000. The firm's marginal tax rate is 24 percent, and the project's cost of capital is 14 percent.What is the total value of the terminal year non-operating cash flows at the end of Year 3? Round it to a whole dollar, and do not include the $ sign. Year MACRS Percent 1 0.33 2 0.45 3 0.15 4 0.07
The president of your company, MorChuck Enterprises, has asked you to evaluate the proposed acquisition of a new chromatograph for the firm's R&D department. The equipment's basic price is $70,000, and it would cost another $15,000 to modify it for special use by your firm. The chromatograph, which falls into the MACRS 3-year class, would be sold after 3 years for $30,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000. The machine would have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 25%. a. What is the Year-0 cash flow? b. What are the cash flows in Years 1, 2, and 3? c. What is the additional (nonoperating) cash flow in Year 3?
The president of your company, MorChuck Enterprises, has asked you to evaluate the proposed acquisition of a new chromatograph for the firm’s R&D department. The equipment’s basic price is $70,000, and it would cost another $15,000 to modify it for special use by your firm. The chromatograph, which falls into the MACRS 3-year class, would be sold after 3 years for $30,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000. The machine would have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firm’s marginal federal-plus-state tax rate is 25%. a. What is the Year-0 cash flow? b. What are the cash flows in Years 1, 2, and 3? c. What is the additional (nonoperating) cash flow in Year 3? d. If the project’s cost of capital is 10%, should the chromatograph be purchased?
Hemisphere, LLC is planning to outsource its 51-person information technology (IT) department to Dyonyx. Hemisphere’s president believes this move will allow access to cutting-edge technologies and skill sets that would be cost prohibitive to obtain on its own. If it is assumed that the loaded cost of an IT employee is $100,000 per year and that Hemisphere will save 25% of this cost through outsourcing, determine the present worth of the total savings for a 5-year contract at an interest rate of 6% per year, compounded monthly
Adidas is evaluating a proposal for a new product. If they launch the product, they will use an existing facility in the production process, which they previously acquired for $4 million. They currently lease it to a third party, and they expect to continue to do so if they don't use it for the new product. They rent it out for $102,000 and they expect that to remain flat for the foreseeable future. The project requires immediate investment in CAPX of $1.3 million, which will be depreciated on a straight-line basis over the next 10 years for tax purposes. The project will end after eight years, at which time they expect to salvage some of the initital CAPX and sell it for $469,000. The project requires immediate working capital investments equal to 10% of predicted first-year sales. After that, working capital will remain at 10% of the following year's expected sales. They expect sales to be $4.6 million in the first year and to stay constant for eight years. Total…