Mala Prohibita Inc. is evaluating a proposal to acquire a new equipment. The equipment would quire an investment of P417,860, including freight and installation cost of P40,000. It expected to have a 10- ar life with no scrap value at the end of its life. It has been estimated that the new equipment would increase e company's cash inflows, net of expenses and income taxes by P68,000. The company can issue its 7% ,000 par value bond to fund the project. The same type of bond is available in the market at P932.04836 per ond with interest payable semi-annually for ten years. The company is subject to 32% income tax. Determine the Cost of Capital (k) Using NPV and IRR method, give your recommendation if the company should push the project or not. Explain your answe

Mala Prohibita Inc. is evaluating a proposal to acquire a new equipment. The equipment would quire an investment of P417,860, including freight and installation cost of P40,000. It expected to have a 10- ar life with no scrap value at the end of its life. It has been estimated that the new equipment would increase e company's cash inflows, net of expenses and income taxes by P68,000. The company can issue its 7% ,000 par value bond to fund the project. The same type of bond is available in the market at P932.04836 per ond with interest payable semi-annually for ten years. The company is subject to 32% income tax. Determine the Cost of Capital (k) Using NPV and IRR method, give your recommendation if the company should push the project or not. Explain your answe

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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Wary Corporation is considering the purchase of a new machine for $180,000. If the new machine is purchased, Wary Corporation will sell existing equipment with a book value of $8,500 for total proceeds of $5,500. An additional $10,000 in working capital will be required for the new machine. Management predicts that the new machine can produce cash sales of $130,000 each year for the next 3 years. The firm uses the straight-line method of depreciation with mid-year convention for tax purposes. The company expects to dispose the new machine for $24,000 (before tax) at the end of year 3. The working capital investment will not be recovered at the end of year 3. Wary 's tax rate is 40%. Management requires a minimum of 12% return on all investments. Required: A. What is the net initial investment? B. What is the before tax gain or loss on disposal of the equipment at the end of year 3? Answer:______________________ gain / loss (circle one) C. What are the relevant after-tax…
You must evaluate a proposal to buy a new milling machine. The purchase price of the milling machine, including shipping and installation costs, is $116,000, and the equipment will be fully depreciated at the time of purchase. The machine would be sold after 3 years for $57,000. The machine would require a $4,000 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $48,000 per year. The marginal tax rate is 25%, and the WACC is 8%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine. How should the $4,500 spent last year be handled? Only the tax effect of the research expenses should be included in the analysis. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay. Last year's expenditure is considered…
Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.18 million. The fixed asset will be depreciated straight- line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1.645 million in annual sales, with costs of $610,000. The project requires an initial investment in net working capital of $250,000, and the fixed asset will have a market value of $180,000 at the end of the project. The tax rate is 21 percent. a. What is the project's Year O net cash flow? Year 1? Year 2? Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567.) b. If the required return is 12 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Year 0 cash flow a. Year 1 cash flow…
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Rundle Airline Company is considering expanding its territory. The company has the opportunity to purchase one af two different used airplanes. The first airplane is expected to cost $14,280,000; it will enable the company to increase its annual cash inflow by $6,800,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $33,840,000; it will enable the company to increase annual cash flow by $9,400,000 per year. This plane has an eight-year useful life and a zero salvage value. Required a. Determine the payback period for each investment alternative and identify the alternative Rundle should accept if the decision is based on the payback approach. (Round your answers to 1 decimal place.) Payback Period a-1. Alternative 1 (First plane) years Alternative 2 (Second plane) years a-2. Rundle should accept alternative 1
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Newcastle Coal Company is considering a project that requires an investment in new equipment of $4,200,000, with an additional $210,000 in shipping and installation costs. Newcastle estimates that its accounts receivable and inventories need to increase by $840,000 to support the new project, some of which is financed by a $336,000 increase in spontaneous liabilities (accounts payable and accruals). The total cost of Newcastle's new equipment is and consists of the price of the new equipment plus the In contrast, Newcastle's initial investment outlay is Suppose Newcastle's new equipment is expected to sell for $1,200,000 at the end of its four-year useful life, and at the same time, the firm expects to recover all of its net operating working capital investment. The company chose to use straight-line depreciation, and the new equipment was fully depreciated by the end of its useful life. If the firm's tax rate is 40%, what is the project's total terminal cash flow? O $1,224,000 ○…
Five Star is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $149,600 of 5% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: Cost of equipment Life of equipment Estimated residual value of equipment Yearly costs to operate the warehouse, excluding depreciation of equipment Yearly expected revenues-years 1-8 Yearly expected revenues-years 9-16 Required: Differential revenue from alternatives: Revenue from operating warehouse Revenue from investment in bonds Differential revenue from operating warehouse 1. Prepare a differential analysis report of the proposed operation of the warehouse for the 16 years as compared with present conditions. Five Star Proposal to Operate Warehouse. Differential cost of alternatives: Costs to operate warehouse ✓ $149,600 16 years $27,500 Cost of equipment less residual…
Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $662,691. The fixed asset will be depreciated straight-line to 61,885 over its 3-year tax life, after which time it will have a market value of $112,268. The project requires an initial investment in net working capital of $78,031. The project is estimated to generate $223,911 in annual sales, with costs of $101,913. The tax rate is 0.29 and the required return on the project is 0.12. What is the total cash flow in year 0? (Make sure you enter the number with the appropriate +/- sign)
GRIP Industries is considering a new assembly line costing RM1,600,000. The instaliation will ncur a cost of RM350,000 and after-tax training cost of RM105,000. The assembly line will be fuly depreciated using the simplified straight-ine method over its 3- year depreciable life. Net working capital is expected to increase by RM420,000 at start and the full amount ill be recovered at the end of up year 3. First year sales are estimated to be RM1,800,00, and illincrease by RM200,000 each year throughout the 3-year period. Variable cost is 55% from sales, while fixed cost takes up RM225,000 per year. At terminal, the assembly line can be sold at RM700,000. GRIP is in the 35 percent tax bracket and has a required rate of returm of 12% A) Calculate the total initial outlay of the project. B) Determine the annual cash flow for the project from year 1 to year 3. C) Calculate the terminal cash flow at year 3. D) Calculate the net present value (NPV) and intermal required rate of return (IRR)…
Normally, JC Corporation pursue a project only if the payback period is not more than 50% of the project's useful life. However the accounting manager suggested that investment decision should not be based only on payback period. Currently, the company is considering to purchase a new machine that will provide annual cash flow of P1,500,000 in the first year of use, P1,200,000 in its second year of use, P1,000,000 in the third year, and P740,000 in each year of the remaining of 8 years life of the project. The machine cost P5,600,000 and could be sold for P2,500,000 after its useful life. The company's cost of capital is 12%. As the investment analyst of the company which of the Payback Method and the Present Value Method would you recommend to become the basis for pursuing the project? Explain your answers. Support your recommendation with computed values.
Lance Co. is planning to purchase a new machine which it will depreciate, for book purposes, on a straight-line basis over a 10 year period with no salvage value and a full year’s depreciation taken in the year of acquisition. The new machine is expected to produce cash flows from operations, net of income taxes, of P66,000 a year in each of the next ten years. The accounting rate of return on the initial investment is expected to be 12%. How much will the new machine cost?

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