2 Leonard Motors is trying to increase its international export business. It is considering several alternatives. The three options along with their associated cash flows are listed below.Options:01: Equipment costs $900K now and another $560K in 2 years. Annual M&O costs $79,000. Life of project is 10 years.02: Subcontract production for an annual payment of $280K for years 0 (now) through 10.03: Pay S400K now. Annual expenses exceed annual revenue starting at EOY 1 by S420K and increase 5% per year through EOY 5. Annual revenues exceed annual expenses by $50K from EOY 6 to 10. There is a salvage value of $100K at EOY 10.Please calculate your answer to the nearest whole dollar. Format 0000 No commasThe MARR for Leonard Motors is 15% APR compounded quarterlya. Which option is most financially beneficial to Leonard Motors?O A. Option 2O B. Option 3OC. Option 1b. Based on part a, what is the PW of the most financially beneficial to Leonard Motors? $

The cost associated with the maintenance of machinery or equipment is known as maintenance and…

Leonard Motors is trying to increase its international export business. It is considering several alternatives. The three options along with their associated cash flows are listed below. Options: 01: Equipment costs $900K now and another $560K in 2 years. Annual M&0 costs $79,000. Life of project is 10 years. 02 Subcontract production for an annual payment of S280K for years 0 (now) through 10. 03 Pay $400K now. Annual expenses exceed annual revenue starting at EOY 1 by $420K and increase 5% per year through EOY 5. Annual revenues exceed annual expenses by $50K from EOY 6 to 10. There is a salvage value of $10OK at EOY 10. Please calculate your answer to the nearest whole dollar. Format 0000 No commas The MARR for Leonard Motors is 15% APR compounded quarterly . Which option is most financially beneficial to Leonard Motors? OA. Option 2 о в. Орion 3 OC. Option 1 . Based on part a, what is the PW of the most financially beneficial to Leonard Motors? $

Leonard Motors is trying to increase its international export business. It is considering several alternatives. The three options along with their associated cash flows are listed below. Options: 01: Equipment costs $900K now and another $560K in 2 years. Annual M&0 costs $79,000. Life of project is 10 years. 02 Subcontract production for an annual payment of S280K for years 0 (now) through 10. 03 Pay $400K now. Annual expenses exceed annual revenue starting at EOY 1 by $420K and increase 5% per year through EOY 5. Annual revenues exceed annual expenses by $50K from EOY 6 to 10. There is a salvage value of $10OK at EOY 10. Please calculate your answer to the nearest whole dollar. Format 0000 No commas The MARR for Leonard Motors is 15% APR compounded quarterly . Which option is most financially beneficial to Leonard Motors? OA. Option 2 о в. Орion 3 OC. Option 1 . Based on part a, what is the PW of the most financially beneficial to Leonard Motors? $

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 15E: Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided...

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Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required: 1. Patz Corporation is considering the purchase of a computer-aided manufacturing system. The cash benefits will be 800,000 per year. The system costs 4,000,000 and will last eight years. Compute the NPV assuming a discount rate of 10 percent. Should the company buy the new system? 2. Sterling Wetzel has just invested 270,000 in a restaurant specializing in German food. He expects to receive 43,470 per year for the next eight years. His cost of capital is 5.5 percent. Compute the internal rate of return. Did Sterling make a good decision?
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of 170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be 138 per case, and the Year-1 cost per case will be 105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the projects NPV?
Wansley Lumber is considering the purchase of a paper company, which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the paper company is 13%. Should Wansley purchase the paper company? Wansley realizes that the cash flows in Years 1 to 20 might be $30 million per year or $50 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company 2 years after purchase (at Year 2 in this case) for $280 million if it no longer wants to own it. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 13%. Wansley can wait for 1 year and find out whether the cash flows will be $30 million per year or $50 million per year before deciding to purchase the company. Because of the nature of the purchase contract, if it waits to purchase, Wansley can no longer sell the company 2 years after purchase. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? If so, when? Again, assume that all cash flows are discounted at 13%.
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Markoff Products is considering two competing projects, but only one will be selected. Project A requires an initial investment of $42,000 and is expected to generate future cash flows of $6,000 for each of the next 50 years. Project B requires an initial investment of $210,000 and will generate $30,000 for each of the next 10 years. If Markoff requires a payback of 8 years or less, which project should it select based on payback periods?
Consolidated Aluminum is considering the purchase of a new machine that will cost $308,000 and provide the following cash flows over the next five years: $88,000, 92,000, $91,000, $72,000, and $71,000. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return in Excel, see Appendix C.
Garnette Corp is considering the purchase of a new machine that will cost $342,000 and provide the following cash flows over the next five years: $99,000, $88,000, $92,000. $87,000, and $72,000. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return in Excel. see Appendix C.
Redbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?
Jasmine Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, and $2,000 for years 6 through 10. What is the payback period for this project?