PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 6, Problem 15PS
Project
- a. Calculate project NPV for each company.
- b. What is the IRR of the after-tax cash flows for each company? Why are the IRRs for A and B the same?
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Problem 6-29 Mutually exclusive investments and project lives
As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both
machines perform the same function but differ in age. The newer machine could be sold today for $78,500. Its operating costs
are $23,800 a year, but at the end of five years, the machine will require a $18,100 overhaul (which is tax deductible).
Thereafter, operating costs will be $31,900 until the machine is finally sold in year 10 for $7,850.
The older machine could be sold today for $26,900. If it is kept, it will need an immediate $29,500 (tax-deductible) overhaul.
Thereafter, operating costs will be $37,900 a year until the machine is finally sold in year 5 for $7,850.
Both machines are fully depreciated for tax purposes. The company pays tax at 21%. Cash flows have been forecasted in real
terms. The real cost of capital is 11%.
a. Calculate the equivalent annual costs for selling the new machine…
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $26,700 per year for five years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate of 21% and can claim 100% bonus depreciation on the investment. Suppose the opportunity cost of capital is 9%. Ignore inflation.
A. Calculate project NPV for each company.
B. What is the IRR of the after-tax cash flows for each company?
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $26,700 per year for five
years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays
corporate taxes at a rate of 21% and can claim 100% bonus depreciation on the investment. Suppose the opportunity cost of capital is
9%. Ignore inflation.
a. Calculate project NPV for each company.
b. What is the IRR of the after-tax cash flows for each company?
Complete this question by entering your answers in the tabs below.
Required A Required B
Calculate project NPV for each company.
Note: Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.
Company A
Company B
NPV
Chapter 6 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 6 - Cash flows Which of the following should be...Ch. 6 - Cash flows Reliable Electric, a major Ruritanian...Ch. 6 - Prob. 3PSCh. 6 - Prob. 4PSCh. 6 - Real and nominal flows Mr. Art Deco will be paid...Ch. 6 - Real and nominal flows Restate the net cash flows...Ch. 6 - Real and nominal flows Guandong Machinery is...Ch. 6 - Working capital Each of the following statements...Ch. 6 - Prob. 9PSCh. 6 - Project NPV Better Mousetraps research...
Ch. 6 - Project NPV A widget manufacturer currently...Ch. 6 - Project NPV Marsha Jones has bought a used...Ch. 6 - Project NPV United Pigpen is considering a...Ch. 6 - Project NPV Imperial Motors is considering...Ch. 6 - Project NPV and IRR A project requires an initial...Ch. 6 - Taxes and project NPV In the International Mulch...Ch. 6 - Depreciation and project NPV Suppose that Sudbury...Ch. 6 - Depreciation and project NPV Ms. T. Potts, the...Ch. 6 - Prob. 20PSCh. 6 - Prob. 21PSCh. 6 - Prob. 22PSCh. 6 - Equivalent annual cash flow Look at Problem 22...Ch. 6 - Equivalent annual cash flow Deutsche Transport can...Ch. 6 - Prob. 25PSCh. 6 - Mutually exclusive investments and project lives...Ch. 6 - Mutually exclusive investments and project lives...Ch. 6 - Mutually exclusive investments and project lives....Ch. 6 - Mutually exclusive investments and project lives...Ch. 6 - Mutually exclusive investments and project lives...Ch. 6 - Replacement decisions Machine C was purchased five...Ch. 6 - Replacement decisions Hayden Inc. has a number of...Ch. 6 - Replacement decisions. You are operating an old...Ch. 6 - Replacement decisions. A forklift will last for...Ch. 6 - The cost of excess capacity The presidents...Ch. 6 - Effective tax rates One measure of the effective...Ch. 6 - Equivalent annual costs We warned that equivalent...
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- A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27,900 per year for five years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate of 21% and can claim 100% bonus depreciation on the investment. Suppose the opportunity cost of capital is 11%. Ignore inflation.a. Calculate project NPV for each company. (arrow_forwardA project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27, 300 per year for five years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate of 21% and can claim a 100% bonus depreciation immediately on the investment. Suppose the opportunity cost of capital is 10%. Ignore inflation. Calculate the project NPV for each company. What is the IRR of the after-tax cash flows for each company?arrow_forwardConsider a hypothetical economy that has NO tax.ABC Ltd. is considering investing in a 2-year project which is expected to generate the followingyear-end cash flows: C1 = $110 million, C2 = $115 million. The yearly discount rate for the projectis 10%. The initial cost of the project is $200 million.(a) Compute the profit and NPV of the project. (b) Based on the answer of part (a), should the project be accepted? Explain.(c) ABC’s cut-off period is 2 years. Compute the PI and Payback of the project. Based on thesetwo methods, should ABC accept the project?(d) Write down the numerical formula for computing the IRR of this project. What is theminimum IRR value that would make this project acceptable? Explain. (e) Given the recommendations based on the four decision rules above, which project shouldABC Ltd. accept? (f) Now suppose that of the $200m initial expenditure, $50m was used for the purchase of amachine that has an estimated economic life of four years. The machine will be…arrow_forward
- *A project costs $298 at t = 0 and generates unlevered after-tax cash flows of $53 per year forever. The project's unlevered cost of capital is 11.9%. The initial cost of the project is paid for with a combination of debt and equity. Debt contributes $87 and will earn interest at 4.8% forever. (The debt is perpetual, it never matures. Assume the debt tax shield cash flows have the same risk profile as the debt cash flows. The debt is fairly priced. All of the project NPV accrues to the equity holders.) The tax rate is 15% . What is the WACC of the levered project? Give your answer in percentage to the nearest 0.1 % . correct answer: 11.6arrow_forward16. A three-year project requires an initial investment of £100,000 and will produce positive net operating cash flows of £40,000, £35,000 and £45,000 in years 1, 2 and 3. The investment has no residual value at the end of the project. The company uses a 10% discount rate and does not currently pay tax. The NPV has been calculated as - £4,690 (i.e. negative). What is the sensitivity of the project decision to changes in the cost of the investment? (a) 0% (b) 4.7% (c) 21.3% (d) 95.3%arrow_forwardQuestion 2 (Investment Decision Rules and Project Cash Flows) Consider a hypothetical economy that has NO tax. ABC Ltd. is considering investing in a 2-year project which is expected to generate the following year-end cash flows: C1 = $110 million, C2 = $115 million. The yearly discount rate for the project is 10%. The initial cost of the project is $200 million. (a) Compute the profit and NPV of the project. (b) Based on the answer of part (a), should the project be accepted? Explain. (c) ABC’s cut-off period is 2 years. Compute the PI and Payback of the project. Based on these two methods, should ABC accept the project? (d) Write down the numerical formula for computing the IRR of this project. What is the minimum IRR value that would make this project acceptable? Explain. (e) Given the recommendations based on the four decision rules above, which project should ABC Ltd. accept? (f) Now suppose that of the $200m initial expenditure, $50m was used for the…arrow_forward
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