PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 11, Problem 18PS
Summary Introduction
To determine:
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1. Marginal Cost-Benefit Analysis
As a financial analyst for Longview Products Company, you have been asked to evaluate a
proposal for new, more efficient manufacturing equipment. The existing equipment will produce
benefits over the next five years of $780,000 in today's dollars. The proposed new equipment
will produce benefits of $970,000 in today's dollars over the same period. The installed cost of
the new equipment is $300,000; the old equipment can be sold for $130,000.
Apply marginal cost-benefit analysis to determine:
a. The marginal benefits of the new equipment
b. The marginal costs of the new equipment
c. The net benefit of the new equipment
d. Based on your calculations, what do you recommend? Why?
e. What factors other than the costs and benefits should be considered before the final
decision is made?
2. Interest verens Dividend Exnence
1. Marginal Cost-Benefit Analysis
As a financial analyst for Longview Products Company, you have been asked to evaluate a
proposal for new, more efficient manufacturing equipment. The existing equipment will produce
benefits over the next five years of $780,000 in today's dollars. The proposed new equipment
will produce benefits of $970,000 in today's dollars over the same period. The installed cost of
the new equipment is $300,000; the old equipment can be sold for $130,000.
Apply marginal cost-benefit analysis to determine:
a. The marginal benefits of the new equipment
b. The marginal costs of the new equipment
c. The net benefit of the new equipment
d. Based on your calculations, what do you recommend? Why?
e. What factors other than the costs and benefits should be considered before the final
decision is made?
2. Interest versus Dividend Expense
Longview Products Company (LPC) expects earnings before interest and taxes of $575,000 for
this year. Under the 2018 tax law, LPC is…
The most likely outcomes for a particular project are estimated as follows:
Unit price
Variable cost
$
49
21
$309, 000
29, 200 uni ts per year
Fixed cost
Expected sales
However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 10%
higher or 10% lower than the initial estimate. The project will last for 13 years and requires an initial investment of $0.99 million, which
will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 35% and the required rate of return is
17%. What is project NPV in the "best case" scenario, that is, assuming all variables take on the best possible value? (Round your
answer to the nearest whole dollar amount.)
NPV in the "best case" scenario
1961296
What about the "worst case" scenario? (Use the minus sign for negative values. Round your answer to the nearest whole dollar
amount.)
NPV in the "worst case" scenario
-148345
Chapter 11 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 11 - Capital budgeting process True or false? a. The...Ch. 11 - Capital budgeting process Explain how each of the...Ch. 11 - Capital budgeting process Draw up an outline or...Ch. 11 - Prob. 4PSCh. 11 - Biased forecasts Look back to the cash flows for...Ch. 11 - Prob. 6PSCh. 11 - Prob. 7PSCh. 11 - Prob. 8PSCh. 11 - Market prices Suppose the current price of gold is...Ch. 11 - Prob. 10PS
Ch. 11 - Prob. 11PSCh. 11 - Prob. 12PSCh. 11 - Prob. 13PSCh. 11 - Economic rents True or false? a. A firm that earns...Ch. 11 - Prob. 16PSCh. 11 - Economic rents Thanks to acquisition of a key...Ch. 11 - Prob. 18PSCh. 11 - Prob. 19PSCh. 11 - Prob. 20PSCh. 11 - Prob. 21PSCh. 11 - Prob. 22PSCh. 11 - Economic rents Taxes are a cost, and, therefore,...Ch. 11 - Prob. 1MCCh. 11 - Libby Flannery, the regional manager of Ecsy-Cola,...
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