We assume that the company that you selected is considering a new project. The project has 8 years' life. Thisproject requires an initial investment of $580 million to purchase equipment, and $30 million for shipping &installation fees. The fixed assets fall in the 7-year MACRS class. The salvage value of the fixed assets is 10% ofthe purchase price (including the shipping & installation fee). The number of units of the new productexpected to be sold in the first year is 2,660,000 and the expected annual growth rate is 10.5%. The salesprice is $280 per unit and the variable cost is $225 per unit in the first year, but they should be adjustedaccordingly based on the estimated annualized inflation rate of 3.0%. The required net operating workingcapital (NOWC) is 11.8% of sales with the corporate tax rate of 21%. The project is assumed to have the samerisk as the corporation, so 5.35% is the discount rate for this hypothetical project. Estimate annual cash flowsfor the 8 years. build the capital budgeting analysis model by yourself.-what is the NPV?-what is the MIRR?-what is the PROFABILITY INDEX?

Capital budgeting is the process of evaluating and selecting long-term investment projects or…

Answered: We assume that the company that you…

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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A project requires an initial investment in equipment of $760,000 immediately (t=0) and is expected to produce sales revenue of $697, 000 the first year; this revenue will increase by 4.5% per year over the next four years. Manufacturing costs are estimated to be 67% of the sales. The project demand analysis, which was done last year, cost $235,000. The asset can be depreciated on a straight-line basis over five years to a zero salvage value. The corporate tax rate is 36%. The project requires an investment in working capital. Specifically, at the beginning of the project (t=0), $45,000 of working capital is required; thereafter, working capital is projected to be 6.0% of revenue. The investment in working capital will be recovered at the end of the fifth year. At the end of the 5th year, the company plans to sell the equipment for $18,900. To calculate the cost of capital for this project, the firm is going to use the following companies as comparable firms. Beta Debt Equity…
Glow Limited is considering expanding its production capacity with the installation of newequipment that will cost $950 000. This equipment is expected to have a useful life of 8 years,when it will be disposed of at a scrap value of $25 000.Import duties on the equipment would amount to 2% of purchase price. Installation and testingcosts would be $15 000. To support the expanded capacity, net working capital would have to beincreased by $29 000. The new equipment would result in annual net operating cash inflows of$300 000.Glow Limited’s cost of capital is 16% and the tax rate is 25%.A. Compute initial, annual and terminal after-tax cash flows. B. Use the NPV method to advise Happy Limited on the effect that installing the new equipment will have on the value of the firm.
A company is considering a project that will require an immediate outlay of $28 000 and $28 000 outlays for the next two years. At the end of the project, the company expects to salvage the physical assets for $49 000. The project is estimated to yield net returns of $58 000 in Year 5, $42 000 in Year 7, and $7 000 for each of the following 5 years. The required rate of return is 13.2%. What is the value for CFo? O a. CFo= $58 000 O b. CFo=-$28 000 c. CFO = $49 000 O d. CFo= $56 000
Bridgeport Industries is considering the purchase of new equipment costing $1,280,000 to replace existing equipment that will be sold for $194,000. The new equipment is expected to have a $220,000 salvage value at the end of its 5-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 32,800 units annually at a sales price of $29 per unit. Those units will have a variable cost of $15 per unit. The company will also incur an additional $86,000 in annual fixed costs. Identify the amount and timing of all cash flows related to the acquisition of the new equipment. (Enter negative amounts using a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Cash Flow Timing Amount Purchase of new equipment $4 Salvage of old equipment Sales revenue Variable costs Additional fixed costs Salvage of new equipment >
We assume that the company you selected is considering a new project. The project has 8 years’ life. This project requires initial investment of $235 million to purchase the building, and purchase equipment, and $15 million for shipping & installation fee. The fixed assets (Total of 235+15= $250 M) fall in the 7-year MACRS class. The salvage value of fixed assets is $38 million. The number of units of the new product expected to be sold in the first year is 900,000 and expected to grow at annual growth rate of 9%. The sales price is $265 per unit and the variable cost is $174 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 2.8%. Therequired net operating working capital (NOWC) for each year is 15% of sales for that year. The company is in the 21% tax bracket. The company’s optimal capital structure is 65% equity and 35 debt financing. Assume a WACC of 7 % based on target capital structure of this firm. (This…
Consider a new electric forklift truck that would cost $18,000, have operating costs of $1,000 in the first year, and have a salvage value of $10,000 at the end of the first year. For the remaining years, operating costs increase each year by 15% over the previous year's operating costs. Similarly, the salvage value declines each year by 25% from the previous year's salvage value. The truck has a maximum life of seven years. Overhauls costing $3,000 and $4,500 will be required during the fifth and seventh years of service, respectively. The firm's required rate of return is 15%. Find the economic service life of this new machine.
The cost of the new machine is $127,000. Installation will cost $20,000. $4,000 in net working capital will be needed at the time of installation. The project will increase revenues by $85,000 per year, but operating costs will increase by 35% of the revenue increase. Simplified straight line depreciation is used. Class life is 5 years, and the firm is planning to keep the project for 5 years. Salvage value at the end of year 5 will be $50,000. 14% cost of capital; 34% marginal tax rate. /////// The depreciation is 29400. How do I get this result? Could you please show me how to get depreciation by NOT using excel but calculation?
Solar Wind is considering a new project. The project will require $325,000 for new fixed assets and $195,000 for additional inventory. Long-term debt is expected to increase by $300,000. The project has a 5-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 25% of their original cost. All inventory is expected to be recovered at the end of the project. The project is expected to generate annual sales of $565,000 and costs before depreciation of $302,000. The tax rate is 35%, and the required rate of return is 15%. The company has other ongoing profitable operations. In the field specified below, provide your answer to the following question: What is the MIRR of the project? For any credit, show all work in your Excel worksheet. In a new Excel worksheet, a) Answer the questions below and b) Place the company name at the top of the page. c) Use this information…
An investment of $20,000 for a new condenser is being considered. Estimated salvage value of the condenser is $5,000 at the end of an estimated life of 6 years. Annual income each year for the 6 years is $8,500. Annual operating expenses are $2,300. Assume money is worth 15% compounded annually. Determine the external rate of return and whether or not the condenser should be purchased.
Miami Machine Shops, Ltd. is consideringpurchasing a vertical drill machine. The machinewill cost $62,000 and will have an eight-year servicelife. The selling price of the machine at the end ofeight years is expected to be $5,000 in today’s dollars. The machine will generate annual revenues of$22,000 (today’s dollars), but the company expectsto have an annual expense (excluding depreciation)of $9,500 (today’s dollars). The asset is classified asa seven-year MACRS property. The project requiresa working-capital investment of $10,000 at year 0.The marginal income tax rate for the firm is averaging 35%. The firm’s market interest rate is 18%.(a) Determine the internal rate of return of thisinvestment.(b) Assume that the firm expects a general inflationrate of 5%, but that it also expects an 8% annualincrease in revenue and working capital and a6% annual increase in expense caused by inflation. Compute the real (inflation-free) internalrate of return. Is this project acceptable?
You are evaluating the proposed acquisition of a new machine costing $57,000, and it falls into the MACRS 3-year class. Purchase of the machine would require an increase of net operating working capital of $4,000, which will be recovered when the machine is sold. The machine would increase the firm's revenues by $30,000 per year and its operating costs by $17,000 per year. The machine is expected to be used only for 3 years and then be sold for $25,000. The firm's marginal tax rate is 27 percent, and the project's cost of capital is 14 percent. What is the non-operating terminal cash flows at year 3? MACRS 3-year schedule is as follows: 33%, 45%, 15%, and 7% for years 1 to 4, respectively. Question 13 options: $22,267 $22,587 $22,907 $23,097 $23,327 $23,607
ABC Corporation is considering starting to manufacture a new product where anequipment costing P200,000 must be installed, which will have a life of 8 yearsand a salvage value equal to 25% of its cost at the end of that time. Productioncost are as follows: Direct labor = 12,000+12 per unit. The new product isestimated to be sold at P25 per unit. If the company’s capital is worth 12.5%before income taxes.a. How many units must be produced to break even?b. If P5000 units are sold out, determine the rate of return.

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