Galvanized Products is considering purchasing a new computer system for their enterprise data management system. The vendor has quoted a purchase price of $100,000. Galvanized Products is planning to borrow one-fourth of the purchase price from a bank at 15% compounded annually. The loan is to be repaid using equal annual payments over a 3-year period. The computer system is expected to last 5 years and has a salvage value of $4,000 at that time. Over the 5-year period, Galvanized Products expects to pay a technician $27,000 per year to maintain the system but will save $57,000 per year through increased efficiencies. Galvanized Products uses a MARR of 14%/year to evaluate investments. a. What is the external rate of return of this investment? ERR = % Do all calculations te 5 decimal nlaces and

Galvanized Products is considering purchasing a new computer system for their enterprise data management system. The vendor has quoted a purchase price of $100,000. Galvanized Products is planning to borrow one-fourth of the purchase price from a bank at 15% compounded annually. The loan is to be repaid using equal annual payments over a 3-year period. The computer system is expected to last 5 years and has a salvage value of $4,000 at that time. Over the 5-year period, Galvanized Products expects to pay a technician $27,000 per year to maintain the system but will save $57,000 per year through increased efficiencies. Galvanized Products uses a MARR of 14%/year to evaluate investments. a. What is the external rate of return of this investment? ERR = % Do all calculations te 5 decimal nlaces and

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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Antara Ltd. is considering the purchase of a new machine for the production of latex. The machine costs $500,000. The machine will be usable for ten years, at which time it will become worthless. Antara plans to update to a new model in five years when it will be sold for $100,000. Annual revenues from the new machine are expected to be $130,000 per year for the first four years of use and $95,000 in Year 5. The company uses the straight-line depreciation method for its non-current assets. The company's cost of capital is 10%. Required: a) Calculate the Accounting Rate of Return (ARR) for the new machine. (Round your answer to two decimal places). b) Calculate the Payback Period for the new machine (Round your answer to two decimal places). c) Calculate the Net Present Value (NPV) for the new machine. Show your workings.
A company is considering establishing a new machine to automate a meat packing process. The machine will save $50,000 in labor annually. The machine can be purchased for $200,000 today and will be used for a period of 10 years. It has a salvage value of $10,000 at the end of its useful life. The new machine will require an annual maintenance cost of $9000. The corporation has a minimum rate of return of 10%.Do you recommendautomating the process? Use all methods discussed in evaluating a single project.
Valentina’s Pizzas Corporation is considering the purchase of a new restaurant for $8 million. The forecasted net cash flows (net of the costs associated with running the restaurant) are $3 million a year for the next 15 years. A major refurbishment costing $2 million will be required after both the fifth and tenth years. After 15 years, the restaurant will be closed and the restaurant’s venue is expected to be sold for $16 million. If the discount rate is 8%, what is this investment’s NPV?
The JessT Company is considering the acquisition of an automatic 3D printer machine for it assemble operation of production line. The project investment of RM35,000 will produce a uniform annual revenue of RM5,310 for seven years and then have a market (salvage) value of RM6,000. Expenses will be RM3,100 in second years and RM2,000 in third years. One-off revenue of RM4, 000 in fifth years will give additional profit to the company. The company is willing to accept any project that will earn 10% per year or more before incomes taxes, on all invested capital. Evaluate whether this project is desirable investment by using the Annual Worth method.
Fuller Ford Company is considering the purchase of a vertical drill machine. The machine will cost $50,000 and will have an eight-year service life. The selling price of the machine at the end of eight years is expected to be $5,000 in today's dollars. The machine will generate annual revenues of $20,000 (today's dollars) but is expected to have an annual expense (excluding depreciation) of $8,000 (today's dollars). The asset is classified as a seven-year MACRS property. The project requires a working-capital investment of $10,000 at year 0. The marginal income-tax rate for the firm is averaging 35%. The firm's market interest rate is 18%.(a) Determine the internal rate of return of this investment.(b )Assume that the firm expects a general inflation rate of 5%, but that italso expects an 8% annual increase in revenue and working capital and a 6% annual increase in expenses, caused by inflation. Compute the real (inflation-free) internal rate of return. Is this project acceptable?
Kyler Co. is considering acquiring a manufacturing plant. The purchase price is $1,250,000. The owners believe the plant will generate net cash inflows of $307,000 annually. It will have to be replaced in seven years. Use the payback method to determine whether Kyler should purchase this plant. Round to one decimal place. Select the formula, then enter the amounts to calculate the payback period for the plant. (Round payback to one decimal place, X.X.) Expected annual net cash inflow Payback The payback occurs + the plant must be replaced, so the payback method = = years purchasing the plant.
Mitchell, Inc. is considering investment in a machine to produce computer keyboards.  The price of the machine is $400,000 and its economic life is ten years.  The machine will be depreciated to a value of zero over the ten-year period.  The total size of the market is 1,000,000 keyboards per year. You can capture 1% of the market share each year.  The price of the keyboards is $40 in the first year.  You will incur fixed costs of $80,000 per year. The variable cost per unit of the keyboard is $20.  The corporate tax rate is 34%.  The discount rate is 15 percent. Estimate the total cash flows and find out the NPV, IRR, and PI of this project.
A Cookie Company has negotiated to introduce a new cookie for 6 years. The cookie would be purchased in boxes from a manufacturer for $100 per box and sold to supermarkets for $200 per box. Annual sales is expected to be 5 000 boxes. The estimated annual cash expenses to sell the new product would be $180,000. The cost of the equipment to package the cookies is $300 000, and the working capital needed is $400 000. After 5 years, the equipment will need to be repaired and maintained at a cost of $25 000. After 6 years, the residual value of equipment will be $50 000. The working capital would be released at the end of 6-year period. The rate of discount of the company is 16%. Required: Compute net present value (NPV) of the new product. Do not compute income tax. Would you recommend the company proceed with this new venture?
A computer platform requires $160,000 initial investment and additional $80,000 after 10 years. The annual software maintenance costs are $6,000 for the first 4 years and $11,000 thereafter. In addition, there is expected to be a recurring major upgrade cost of 27,000 every 13 years. Assuming 5% interest rate, calculate the capitalized value of the project's costs (Round your answer to 2 decimal places and don't include the $ sign in your answer)
Carlton Co plans to buy a new machine. The cost of the machine, payable immediately, is $800,000 and the machine has an expected life of five years (straight line). Additional investment in working capital of $90,000 will be required at the start of the first year of operation. At the end of five years, the machine will be sold for scrap, with the scrap value expected to be 5% of the initial purchase cost of the machine. The machine will not be replaced. Production and sales from the new machine are expected to be 100,000 units per year. Each unit can be sold for $16 per unit and will incur variable costs of $11 per unit. Incremental fixed costs arising from the operation of the machine will be $160,000 per year. The production and sales are expected to increase by 2% per annum. It is also expected that selling price inflation will be 5% per year, variable cost inflation will be 5% per year and fixed cost inflation will be 3% per year Carlton Co has an after-tax cost of capital of 11%…
I need a detailed explanation on to solve this problem: You plan to open a grooming center. The grooming equipment will cost $405,000, to be paid immediately. You expect aftertax cash inflows of $88,000 annually for six years, after which you plan to scrap the equipment and retire to the beaches of Nevis. The first cash inflows occurs at the end of the first year. Assumed the required return is 13%. What is the project's Profitability Index (PI)?
South Side, Inc., is considering opening a branch in another state. The operating cash flow will be $185,000 a year. The project will require new equipment costing $495,000 that would be depreciated on a straight-line basis to zero over the 5-year life of the project. The equipment will have a market value of $95,000 at the end of the project. The project requires an initial investment of $110,000 in net working capital, which will be recovered at the end of the project. The tax rate is 28 percent. What is the project's IRR? Enter your answer as a whole number rounded to three decimal places, i.e., enter 5.123% as 5.123.

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