Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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The firm is formed to purchase and operate a vehicle. The purpose of the vehicle is to operate a delivery service for one year. The life of the vehicle is only one year, after which time the vehicle is worthless. The debt will be repaid with interest and the firm will be shut down and capital returned to shareholder at year end.
The firm is contemplating the following (base case):
Vehicle acquisition cost $ 48,000
Years of useful life (economic life) 1
Tax rate 25%
Required rate of
Required return on debt 6%
Debt ratio 40%
Annual revenues $ 175,000
Operating expenses (EXCLUDING
1.Depreciate straight-line over the year of useful life, down to $0 over one year.
- The maximum dividend is paid at year end.
- Ignore any working capital effects.
- Capital charge will be based on the assets at the beginning of each year.
FInd
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- J.B. Enterprises is considering the purchase of new equipment with a cost of $1,000,000. If the equipment is purchased, the incremental net cash flows are expected to be $300,000 per year for five years. These net cash flows already reflect the of the equipment and the company’s 40% tax rate. However, there are liability risks associated with the use of this product. The board of directors estimates a “cost of worry” of $25,000 per year. Calculate the net present value of this project incorporating the cost of worry if the company’s cost of capital is 10%. a. $42,466 b. $340,909 c. $375,000 d. $61,420arrow_forward4arrow_forwardBottoms up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $3,600 and sell its old washer for $900. The new washer will last for 6 years and save $1,100 a year in expenses. The opportunity cost of capital is 20% and the firms tax rate is 21%. a) if the firm uses straight-line depreciation over a 6 year life, what are the cash flows of the project in years 0 to 6? The new washer will have zero salvage value after 6 years, and the old washer is fully depreciated. (negative amounts should be indicated by a minus sign.) annual operating cash flow in year 0? annual operating cash flow in years 1 to 6? b) what is the project NPV? (Do not round intermediate calculations. round answer to 2 decimal places. c) what is the NPV if the investment is entitled to immediate 100% bonus depreciation? (do not round intermediate calculations. round your answer to 2 decimals places.arrow_forward
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