Nova-Norda Industries is considering an expansion. The necessary equipment would be purchased for 5 million dollars. The shipment charges for the equipment is estimated to be $200,000. The firm needs an additional 2 million dollars in working capital, of which $500,000 will be financed with Accounts Payable.The firm spent 100,000 dollars on research related to the project, last year. The firm owns a building and plans to use the building for the project. The building could be sold for 2 million dollars after taxes. What is the initial investment outlay?

Nova-Norda Industries is considering an expansion. The necessary equipment would be purchased for 5 million dollars. The shipment charges for the equipment is estimated to be $200,000. The firm needs an additional 2 million dollars in working capital, of which $500,000 will be financed with Accounts Payable.The firm spent 100,000 dollars on research related to the project, last year. The firm owns a building and plans to use the building for the project. The building could be sold for 2 million dollars after taxes. What is the initial investment outlay?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter17: Long-term Investment Analysis

Section: Chapter Questions

Problem 4E

See similar textbooks

Similar questions

Your company has an opportunity to invest in a project that is expected to result in after-tax cash flows of $13,000 the first year, $15,000 the second year, $18,000 the third year, -$8,000 the fourth year, $25,000 the fifth year, $31,000 the sixth year, $34,000 the seventh year, and -$6,000 the eighth year. The project would cost the firm $67,100. If the firm's cost of capital is 12%, what is the modified internal rate of return?
Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. It is considering the "weight loss" smoothies project. The project would require a $4 million investment outlay today The after-tax cash flows would depend on consumers’ demand. There is a 30% chance that demand will be good, and the project will produce after-tax cash flows of $2 million at the end of each year for the next 3 years. There is a 70% chance that demand will be poor, and the project will produce after-tax cash flows of $1 million at the end of each year for the next 3 years. The project is riskier than the firm's other projects, so it has a WACC of 12%. - The firm will know whether the project is success or not after receiving first year's cash flows from normal operating.. - After receiving the first year's cash flows (no matter what receive $1M or $2M in the first year), the firm will have the option to abandon the project. - If the firm decides to abandon the project, the company will no longer…
The Friendly Greetings greeting card company outsources printing to a nearby printing shop, which charges a $1200 fixed charge to start producing a design of card, then $0.30 for each card produced. The printing shop turns around production orders quite quickly, so lead time can be considered negligible. Demand for birthday cards of a certain classic design has long been at a constant and steady rate of 25,000 cards per year. Friendly Greetings stores cards in its own warehouse. The company estimates holding costs to be 5 cents per card per year, including variable warehousing costs and the opportunity cost of capital. The company’s current ordering policy is not necessarily optimal. They place an order for 15,000 cards when their stock of cards approaches zero. How much on average do they spend annually on fixed production charges for the birthday card design?
Gordon Inc. has a number of copiers that were bought four years ago for $20,000. Currently maintenance costs $2,000 a year, but the maintenance agreement expires at the end of two years and thereafter the annual maintenance charge will rise to $8,000. The machines have a current resale value of $8,000, but at the end of year 2 their value will have fallen to $3,500. By the end of year 6 the machines will be valueless and would be scrapped. Gordon is considering replacing the copiers with new machines that would do essentially the same job. These machines cost $25,000, and the company can take out an eight-year maintenance contract for $1,000 a year. The machines have no value by the end of the eight years and would be scrapped. Both machines are depreciated by using seven-year MACRS, and the tax rate is 35 percent. Assume for simplicity that the inflation rate is zero. The real cost of capital is 7 percent. When should Gordon replace its copiers, now, the end of year 2, or the end of…
Southeastern Bell stocks a certain switch connector at its central warehouse for supplying field service offices. The yearly demand for these connectors is 15,000 units. Southeastern estimates its annual holding cost for this item to be $25 per unit. The cost to place and process an order from the supplier is $75. The company operates 300 days per year, and the lead time to receive an order from the supplier is 2 working days. a) Find the economic order quantity. b) Find the annual holding costs. c) Find the annual ordering costs. d) What is the reorder point?
A small manufacturing firm is considering the purchase of a new machine to modernize one of its current production lines. Two types of machines are available on the market. The lives of Machine A and Machine B are four years and six years, respectively, but the firm does not expect to need the service of either machine for more than five years. The machines have the following expected receipts and disbursements: After four years of use, the salvage value for Machine B will be $1,000. The firm always has another option: to lease a machine at $3,000 per year, fully maintained by the leasing company. The lease payment will be made at the beginning of each year.(a) How many decision alternatives are there?(b) Which decision appears to be the best at i = 10%?
Burlington Motor Carriers, a trucking company, is considering the installation of a two-way mobile satellite messaging service on its 2,000 trucks. From tests done last year on 120 trucks, the company found that satellite messaging could cut 60% of its $5 million bill for long-distance communications with truck drivers. More importantly, the drivers who used this system reduced the number of "deadhead" miles-those driven without paying loads-by 0.5%. Applying that improvement to all 230 million miles covered by the Burlington fleet each year would produce an extra $1.25 million in savings. Equipping all 2,000 trucks with the satellite hookup will require an investment of $8 million and the construction of a message-relaying system costing $2 million. The equipment and onboard devices will have a service life of eight years and negligible salvage value; they will be depreciated under the five-year MACRS class. Burlington's marginal tax rate is about 38%, and its required minimum…
Howard Bowen is a large-scale cotton farmer. The land and machinery he owns has a current market value of $4 million. Bowen owes his local bank $3 million. Last year Bowen sold $5 million worth of cotton. His variable operating costs were $4.5 million; accounting depreciation was $40,000, although the actual decline in value of Bowen's machinery was $60,000 last year. Bowen paid himself a salary of $50,000, which is not considered part of his variable operating costs. Interest on his bank loan was $400,000. If Bowen worked for another farmer or a local manufacturer, his annual income would be about $30,000. Bowen can invest any funds that would be derived if the farm were sold to earn 10 percent annualy. (ignore taxes.) a. Compute Bowen's accounting profits. b. Compute Bowen's econnomic profits.
The annual income from the mine is 100,000 and the life of the mine is 20 years. Find the price that an investor is willing to pay for the mine if he considers that money is worth 5% and if he is to accumulate a sinking fund at 6% in order to replace the capital he invested.
A large electric utility company has proposed building an $820 million combined cycle, gas-powered plant to replace the electric generation capacity at one of its coal-fired facilities. Develop three other alternatives for replacing this electric generation capacity.
Replacement versus expansion cash flows- Tesla Systems has estimated the cash flows over the five-year lives of a project that will install new equipment to replace old equipment. If the firm makes this investment, it will sell the old equipment and receive after-tax proceeds of $1,551,000. If the firm decides not to undertake this project, the old equipment will remain in service and generate the cash flows listed in years 1 through 5, and it will have no value after five years. These cash flows are summarized in the following table: New equipment Old equipmentNew equipment cost -4,645,000 Year Operating cash flows 1 551,000 372,000 2 931,000 372,000 3 1,344,000 372,000 4 2,221,000 372,000 5 3,399,000 372,000 New Equipment Old Equipment New Equipment Cost -$4,645,000 Year Operating Cash Flows 1 $551,000 $372,000 2 $931,000 $372,000 3 $1,344,000 $372,000 4 $2,221,000 $372,000 5 $3,399,000…
Cori's Meats is looking at a new sausage system with an installed cost of $495,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $73,000. The sausage system will save the firm $175,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $32,000. If the tax rate is 23 percent and the discount rate is 10 percent, what is the NPV of this project?