Mike Mulligan wants to expand his heavy equipment business into excavation. He plans to buy a used excavator for $300,000. The excavator requires an inventory of spare parts worth $ 10,000. These investments will occur immediately. Mulligan will operate the excavation business for two years and expects EBITDA of $200,000 at the end of each year. He will close his business at the end of the second year, sell the equipment for $100,000 and liquidate the inventory of spare parts. Mulligan pays a tax rate of 25%. Using this information, compute the appropriate values for operating cash flow, investments in net working capital, CAPEX and free cash flow for each year of the project.

Mike Mulligan wants to expand his heavy equipment business into excavation. He plans to buy a used excavator for $300,000. The excavator requires an inventory of spare parts worth $ 10,000. These investments will occur immediately. Mulligan will operate the excavation business for two years and expects EBITDA of $200,000 at the end of each year. He will close his business at the end of the second year, sell the equipment for $100,000 and liquidate the inventory of spare parts. Mulligan pays a tax rate of 25%. Using this information, compute the appropriate values for operating cash flow, investments in net working capital, CAPEX and free cash flow for each year of the project.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 14P

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Mike Mulligan wants to expand his heavy equipment business into excavation. He plans to buy a used excavator for $300,000. The excavator requires an inventory of spare parts worth $ 10,000. These investments will occur immediately. Mulligan will operate the excavation business for two years and expects EBITDA of $200,000 at the end of each year. He will close his business at the end of the second year, sell the equipment for $100,000 and liquidate the inventory of spare parts. Mulligan pays a tax rate of 25%. Using this information, compute the appropriate values for operating cash flow, investments in net working capital, CAPEX and free cash flow for each year of the project.
Concord Pacific is considering purchasing a small residential building in Abbotsford that will cost $1,700,000 and will require $120,000 in renovations immediately. Revenue from rent is estimated to be $500,000 a year. Expenses are estimated to be $200,000 a year. They plant to keep the building for 6 years and estimates they will be able to sell the building for $2,200,000 at the end of 6 years. Assume expenses occur at the beginning of the year and revenue at the end of the year. Concord wants to earn at least 18% per year. Concord has calculated the NPV of this project is -$81,683.54. To encourage businesses to invest, the provincial government is considering giving Concord a one-time tax credit payable at the end of 2 years. How large of a tax credit does Concord require if they want to earn at a minimum of 18% per year?
BECE Developments is considering purchasing a small commercial building located in Prince George that will cost $800,000 and will require $125,000 in renovations immediately. Revenue from rent is estimated to be $200,000 a year. Expenses are estimated to be $50,000 a year. The company plans to keep the building for 6 years and estimates they will be able to sell the building for 25% more than the original purchase price. BECE wants to earn at least 20%. Assume expenses occur at the beginning of the year and revenue at the end of the year. What is the IRR? Question 5 options: IRR=16.24%, earn possitive return, yes, invest IRR=16.24%, less than required 20%, not invest IRR=-8.15%, earn negative return, not invest IRR=16.06%, earn possitive return, yes, invest
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RKE & Associates is considering the purchase of a building it currently leases for $30,000 per year. The owner of the building put it up for sale at a price of $180,000, but because the firm has been a good tenant, the owner offered to sell it to RKE for a cash price of $160,000 now. If purchased now, how long will it be before the company recovers its investment at an interest rate of 15.00% per year? Solve by using the NPER function. The company will recover its investment in years.
Your company is about to undertake a major investment project. The project will require an initial investment of $200 million in a machine plus another $35 million for working capital. Tax authorities will allow you to depreciate the machine on a straight-line basis over four years to a salvage value of zero. In fact, however, you expect that you can sell the machine for $30 million at the end of Year 4. You will need to have a working capital balance on hand at the end of each year equal to 30% of that year’s sales. The working capital can be fully recovered at the end of the project’s life. You expect that the project will generate $100 million in sales and $40 million in cash operating expenses (excluding depreciation) during each of the next four years. The corporate tax rate is 40%. The discount rate is 7.25%. What is NPV of this project?
Barbara Thompson is considering the purchase of a piece of business rental property containing stores and offices at a cost of $350,000. Barbara estimates that annual receipts from rentals will be $55,000 and that annual disbursement. other than income taxes will be about $18,000. The property is expected to appreciate at the annual rate of 5%. Barbara expects to retain the property for 20 years once it is acquired. Then it will be depreciated on the basis of the 39-year real-property class (MACRS), assuming that the property would be placed in service on January 1.Barbara's marginal tax rate is 30%, and her MARR is 10%. What would be the minimum annual total of rental receipts that would make the investment break-even'?
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RKE & Associates is considering the purchase of a building it currently leases for $30,000 per year. The owner of the building put it up for sale at a price of $170,000, but because the firm has been a good tenant, the owner offered to sell it to RKE for a cash price of $160,000 now. If purchased now, how long will it be before the company recovers its investment at an interest rate of 15% per year? Solve by speadsheet function or factor.
Crane Lumber, Inc., is considering purchasing a new wood saw that costs $75,000. The saw will generate revenues of $100,000 per year for five years. The cost of materials and labor needed to generate these revenues will total $60,000 per year, and other cash expenses will be $10,000 per year. The machine is expected to sell for $4,400 at the end of its five-year life and will be depreciated on a straight-line basis over five years to zero. Crane’s tax rate is 34 percent, and its opportunity cost of capital is 10.50 percent.- What is the project's NPV? - The copmany should (buy/not buy) the machine?
Crane Lumber, Inc., is considering purchasing a new wood saw that costs $75,000. The saw will generate revenues of $100,000 per year for five years. The cost of materials and labor needed to generate these revenues will total $60,000 per year, and other cash expenses will be $10,000 per year. The machine is expected to sell for $4,400 at the end of its five-year life and will be depreciated on a straight-line basis over five years to zero. Crane’s tax rate is 34 percent, and its opportunity cost of capital is 10.50 percent. - What is the project's NPV?
Ivanhoe Lumber, Inc., is considering purchasing a new wood saw that costs $45,000. The saw will generate revenues of $100,000 per year for five years. The cost of materials and labor needed to generate these revenues will total $60,000 per year, and other cash expenses will be $10,000 per year. The machine is expected to sell for $1,000 at the end of its five-year life and will be depreciated on a straight-line basis over five years to zero. Ivanhoe's tax rate is 26 percent, and its opportunity cost of capital is 13.70 percent. What is the project's NPV? (Do not round intermediate calculations. Round final answer to 0 decimal places, e.g. 5,275.) NPV $ Should the company purchase the saw? The company the saw.