PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 6, Problem 19PS
Depreciation and project
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2. (Ignore income taxes in this problem.) The management of Stanforth Corporation is investigating
automating a process. Old equipment, with a current salvage value of $24,000, would be replaced by a new
machine. The new machine would be purchased for $516,000 and would have a six-year useful life and no
salvage value. By automating the process, the company would save $173,000 per year in cash operating
costs. The simple rate of return on the investment is closest to
percent.
A. 17.7
B. 16.9
C. 16.7
D. 33.5
A company is thinking of opening a new office, and the key data are shown below. The
company owns the building that would be used, and it could sell it for $100,000 after taxes
if it decides not to open the new office. The equipment for the project would be
depreciated by the straight-line method over the project's 3-year life, after which it would be
worth nothing and thus it would have a zero salvage value. No change in net operating
working capital would be required, and revenues and other operating costs would be
constant over the project's 3-year life. What is the project's NPV? (Hint: Cash flows are
constant in Years 1-3.) Do not round the intermediate calculations and round the final
answer to the nearest whole number.
WACC
10.0%
Opportunity cost
$100,000
Net equipment cost (depreciable basis) $65,000
Straight-line depr. rate for equipment
33.333%
Annual sales revenues
$128,000
Annual operating costs (excl. depr.) $25,000
Tax rate
35%
Spotless Cleaning Ltd wishes to evaluate an investment on a particular washing machine. In your role as consultant to the company you have collected the following information regarding this machine:
Washing Machine
Purchase Price
9,800
Life
10 years
Annual Maintenance cost
150
Expected Salvage Value
1,000
Once bought, this machine will be depreciated to zero over its life. The company's tax rate is 30%. The company has revenues that are not impacted by the choice of machine against which any losses for tax purposes can be offset. The cost of capital required to finance this project is 8% p.a. compounded annually.
1.What is the net cash flow of this washing machine investment at the start (in Year 0)？
2.What is the net cash flow of this washing machine investment in year 10?
3.Calculate the net present value of the investment opportunity to buy this washing machine.
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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