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Comparing Mutually Exclusive Projects [LO4] Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,600,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $195,000 per year. Machine B costs $5,200,000 and will last for nine years. Variable costs for this machine are 30 percent of sales and fixed costs are $230,000 per year. The sales for each machine will be $10 million per year. The required return is 10 percent, and the tax rate is 35 percent. Both machines will be
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Fundamentals of Corporate Finance
- 15 UPS is considering the purchase of a electric truck that would cost $150,000 and would last for 5 years. At the end of 5 years, the truck would have a salvage value of $20,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $45,000. The company requires a minimum return of 19% on all investment projects. The net present value of the proposed project is closest to (Ignore income taxes.): PV factor of $1 annuity for 5 years at 19% is 3.058 and PV of $1 over 5 years is 0.419 A. $85,000 B. -$12,390 C. -$4,010 D. $145,990arrow_forward4arrow_forward[EXCEL] Net present value: Management of Franklin Mints, a confectioner, is considering purchasing a new jelly bean-making machine at a cost of $312,500. They project that the cash flows from this investment will be $121,450 for the next seven years. If the appropriate discount rate is 14 percent, what is the NPV for the project? please use excelarrow_forward
- Economics A new process for manufacturing lead pencils will have a first cost of $35,000 and annual costs of $17,000. The new process will double their capacity. The extra income expected from the new process is $22,000 per year. (a) What is the no- return payback period for this project? (b) What is the payback period at an interest rate of 10% per year?arrow_forward15. Project NPV (S6.3) A widget manufacturer currently produces 200,000 units a year. It buys widget lids from an Page 176 outside supplier at a price of $2 a lid. The plant manager believes that it would be cheaper to make these lids rather than buy them. Direct production costs are estimated to be only $1.50 a lid. The necessary machinery would cost $150,000 and would last 10 years. This investment could be written off immediately for tax purposes. The plant manager estimates that the operation would require additional working capital of $30,000 but argues that this sum can be ignored since it is recoverable at the end of the 10 years. If the company pays tax at a rate of 21% and the opportunity cost of capital is 15%, would you support the plant manager's proposal? State clearly any additional assumptions that you need to make.arrow_forward12 You will bid to supply 3 jets per year for each of the next three years to the Navy. To get set up, you will need $60 million in equipment, to be depreciated straight‐line to zero over three years, with no salvage value. Total fixed costs per year are $10 million, and variable costs are $12 million per jet. If the maximum you can offer is $22 million each, what should you receive in salvage value before taxes in year 3 for the equipment?arrow_forward
- so.4arrow_forwardi need the answer quicklyarrow_forward13. Project Analysis You are considering a new product launch. The project will cost$720,000, have a 4-year life, and have no salvage value; depreciation is straight-line tozero. Sales are projected at 380 units per year; price per unit will be $17,400; variablecost per unit will be $14,100; and fixed costs will be $680,000 per year. The requiredreturn on the project is 15 percent and the relevant tax rate is 21 percent.a. Based on your experience, you think the unit sales, variable cost, and fixed costprojections given here are probably accurate to within ±10 percent. What are theupper and lower bounds for these projections? What is the base-case NPV? What arethe best-case and worst-case scenarios?b. Evaluate the sensitivity of your base-case NPV to changes in fixed costs.c. What is the accounting break-even level of output for this project?arrow_forward
- 26. Scenario Analysis Consider a project to supply Detroit with 26,000 tons of machine screws annually for automobile production. You will need an initial $2,900,000 investment in threading equipment to get the project started; the project will last for five years. The accounting department estimates that annual fixed costs will be $345,000 and that variable costs should be $295 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 5-year project life. It also estimates a salvage value of $275,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $375 per ton. The engineering department estimates you will need an initial net working capital investment of $500,000. You require a 13 percent return and face a marginal tax rate of 24 percent on this project. a. What is the estimated OCF for this project? The NPV? Should you pursue this project? b. Suppose you believe…arrow_forward9arrow_forwardWestJet Airlines is considering purchasing 20 new planes that will save the company $25 million per year in fuel and maintenance costs for the next 10 years. If the cost of the new planes is $200 million dollars and WestJet's weighted average cost of capital (WACC) is 8.5%, what is the net present value (NPV) of the project? A. $4.4 million B. $30.4 million C. $50 million D. $0 E. -$200,000 Only typed answerarrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning