Raph Inc. needs someone to supply it with 1,000,000 planks of wood per year to support itsmanufacturing needs over the next six years, and your company has decided to bid on the contract. Itwill cost your firm $5,000,000 to install the equipment necessary to start production. The equipmentwill be depreciated using the straight-line method to 0 over the project's life. The salvage value of theequipment is expected to be 0. Your fixed costs will be $2,000,000 annually, and your variableproduction costs are $14 per plank. You also need an initial investment in net working capital of $2,000,000, which will be recovered at the end of the project. The firm has a tax rate of 21%, and therequired rate of return is 10%. Calculate the bid price. (Round to 3 decimals)

The lowest bid price is the selling price that will earn the lowest required rate of return after…

Answered: Raph Inc. needs someone to supply it…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 15P

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Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given here. The company’s cost of capital is 10%. Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life? Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to go ahead and develop the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that could result in environmental damage. Before proceeding with the extraction, CTC must spend 900,000 for new mining equipment and pay 165,000 for its installation. The mined gold will net the firm an estimated 350,000 each year for the 5-year life of the vein. CTCs cost of capital is 14%. For the purposes of this problem, assume that the cash inflows occur at the end of the year. a. What are the projects NPV and IRR? b. Should this project be undertaken if environmental impacts were not a consideration? c. How should environmental effects be considered when evaluating this or any other project? How might these concepts affect the decision in part b?
Montello Inc. purchases a delivery truck for $25,000. The truck has a salvage value of $6,000 and is expected to be driven for 125,000 miles. Montello uses the units-of-production depreciation method, and in year one the company expects the truck to be driven for 26,000 miles; in year two, 30,000 miles; and in year three, 40,000 miles. Consider how the purchase of the truck will impact Montellos depreciation expense each year and what the trucks book value will be each year after depreciation expense is recorded.
James Inc. needs someone to supply it with 1,000,000 planks of wood per year to support its manufacturing needs over the next six years, and your company has decided to bid on the contract. It will cost your firm $5,000,000 to install the equipment necessary to start production. The equipment will be depreciated using the straight-line method to 0 over the project's life. The salvage value of the equipment is expected to be 0. Your fixed costs will be $2,000,000 annually, and your variable production costs are $14 per plank. You also need an initial investment in net working capital of $2,000,000, which will be recovered at the end of the project. The firm has a tax rate of 21%, and the required rate of return is 10%. A) Calculate the initial cash outflow (enter a negative value and round to 2 decimals) B) Calculate the bid price. (Round to 3 decimals) C) Based on the bid price, calculate the OCF for year 1. (Round to 2 decimals)
Raph Inc. needs someone to supply it with 500,000 planks of wood per year to support its manufacturing needs over the next four years, and your company has decided to bid on the contract. It will cost your firm $4,000,000 to install the equipment necessary to start production. The equipment will be depreciated using the straight-line method to 0 over the project's life. The salvage value of the equipment is expected to be 0. Your fixed costs will be $1,000,000 annually, and your variable production costs are $10 per plank. You also need an initial investment in net working capital of $1,500,000, which will be recovered at the end of the project. The firm has a tax rate of 21%, and the required rate of return is 10%. Calculate the bid price. (Round to 3 decimals)
Raph Inc. needs someone to supply it with 1,000,000 planks of wood per year to support its manufacturing needs over the next six years, and your company has decided to bid on the contract. It will cost your firm $5,000,000 to install the equipment necessary to start production. The equipment will be depreciated using the straight-line method to 0 over the project's life. The salvage value of the equipment is expected to be 0. Your fixed costs will be $2,000,000 annually, and your variable production costs are $14 per plank. You also need an initial investment in net working capital of $2,000,000, which will be recovered at the end of the project. The firm has a tax rate of 21%, and the required rate of return is 10%. Calculate the bid price. (Round to 3 decimals) Calculate the OCF for year 1, based on the Bid price. (Round to 2 decimals)
Larson Manufacturing is considering purchasing a new injection-molding machine for $250,000to expand its production capacity. It will cost anadditional $20,000 to do the site preparation. Withthe new injection-molding machine installed, Larson Manufacturing expects to increase its revenueby $90,000. The machine will be used for five years,with an expected salvage value of $75,000. At aninterest rate of 12%, would the purchase of the injection-molding machine be justified?
:You are evaluating two different silicon wafer milling machines. The Techron I costs $265,000, has a 3-year life, and has pretax operating costs of $74,000 per year. The Techron II costs $445,000, has a 5-year life, and has pretax operating costs of $47,000 per year. For both milling machines, we use straight line depreciation to zero over the project’s life and assume a salvage value of $35,000. If your tax rate is 22 percent and your discount rate is 10 percent, compute the EAC for both machines. Which machine do you prefer? Why?
Your firm is replacing a manually-operated machine with a fully automated machine. The old machine was purchased 5 years ago, had an original depreciable value of $140,000, and is depreciable using simplified straight-line for 10 years. The old machine has maintenance and defects costs totaling $9,000 per year. The current salvage value of the old machine is $12,000. The new machine costs $80,000 with shipping costs of $2,000. The new machine would be depreciated over 5 years using simplified straight line, and would have no salvage value after the fifth year. The new machine would have maintenance and defects costs totaling $4,000 per year. The tax rate is 21%. What is the annual cash flow for years 1 through 5 (not including the terminal cash flow) if the project is undertaken?
A firm is considering replacing a machine that has been used for making a certain kind of packaging material. The new machine will cost $31,000 and will have an estimated economic life of 10 years with a salvage value of $2,500. Operating costs are expected to be $1,000 per year throughout its service life. The machine currently in use had an original cost of $25,000 four years ago, and its service life (physical life) at the time of purchase was estimated to be seven years with a salvage value of $5,000. This machine has a current market value of $7,700. If the firm retains the old machine, its updated market values and operating costs for the next four years will be as follows: The firm's minimum attractive rate of return is 12%.(a) Working with the updated estimates of market values and operating costs over the next four years, determine the remaining useful life of the old machine.(b) Determine whether it is economical to make the replacement now.(c) If the firm's decision in part…
You are evaluating two different silicon wafer milling machines. The Techron I costs $195,000, has a three-year life, and has pretax operating costs of $32,000 per year. The Techron II costs $295,000, has a five-year life, and has pretax operating costs of $19,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $20,000. If your tax rate is 35 percent and your discount rate is 14 percent, compute the EAC for both machines. Which do you prefer? Why?

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