Moon Corp. is considering a new product whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero-salvage value, and no change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other Plastic products and would reduce their pre-tax annual cash flows. What is the project's NPV? IRR? Briefly discuss the results and why you would accept or reject the equipment. WACC 10.0% Pre-tax cash flow reduction for other products (cannibalization) −$5,000 Investment cost (depreciable basis) $80,000 Annual sales revenues $67,500 Annual operating costs (excl. depreciation) −$25,000 Tax rate 21.0%

Moon Corp. is considering a new product whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero-salvage value, and no change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other Plastic products and would reduce their pre-tax annual cash flows. What is the project's NPV? IRR? Briefly discuss the results and why you would accept or reject the equipment. WACC 10.0% Pre-tax cash flow reduction for other products (cannibalization) −$5,000 Investment cost (depreciable basis) $80,000 Annual sales revenues $67,500 Annual operating costs (excl. depreciation) −$25,000 Tax rate 21.0%

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 4P: Although the Chen Company’s milling machine is old, it is still in relatively good working order and...

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WorldTrans is considering a new salsa whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other WorldTrans products and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.) Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC 10.0% Pre-tax cash flow reduction for other products (cannibalization) -$5,000 Investment cost (depreciable basis) $80,000 Straight-line depr. rate 33.333% Annual sales revenues $66,000 Annual operating costs (excl. depr.) -$25,000 Tax rate 35.0%
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Eastern Clothing Company is considering manufacturing a new style of shirt, whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other Eastern's products and would reduce their pre-tax annual cash flows. What is the project's NPV? WACC Pre-tax cash flow reduction for other products (cannibalization) Investment cost (depreciable basis) Straight-line deprec. Per year Sales revenues, each year for 3 years Annual operating costs (excl. deprec.) Tax rate 10.00% $7,500 $90,000 $30,000 $75,000 $25,000 35.00%
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Not Using Excel Yummy Foods is considering a new salsa product whose data are shown below. The equipment that would beused has a 3-year tax life, would be depreciated by the straight line method over the project's 3-year life,would have zero salvage value, and no new working capital would be required. Revenues and other operatingcosts are expected to be constant over the project's 3-year life. However, this project would compete withother Yummy products and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint:Cash flows are constant in Years 1-3.) WACC 10%Annual pre-tax cannibalization cost $ 5,000Net investment cost (depreciable basis) $65,000Straight line depr'n rate 33.33%Sales revenues $70,000Operating costs excl. depr'n $25,000Tax rate 35%
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Jones Car Wash is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight line method over the project's 3 year life, and would have zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. If the number of cars washed declined by 50% from the expected level, by how much would the project's NPV change? (Hint: Cash flows are constant in Years 1-3.) WACC 10% Net equipment cost (depreciable Annual depreciation Number of cars washed Average price per car Operating costs excl. depr'n Tax rate (A) -$74,781 (B) -$78,385 -$82,578 (D) -$85,713 E -$56,576 basis) $20,000 35% $60,000 2,800 $25 $25,000
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bartleby, a Learneo, Inc. business

WACC	10.0%
Pre-tax cash flow reduction for other products (cannibalization)	−$5,000
Investment cost (depreciable basis)	$80,000

Annual sales revenues	$67,500
Annual operating costs (excl. depreciation)	−$25,000
Tax rate	21.0%