Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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6) Perego Company is considering a new equipment which will cost $75,000 today. The equipment would be
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- Your company is considering a project which will require the purchase of $715,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $256,000. Initial net working capital equal to 32.00% of sales will be required. All of the net working capital will be recovered at the end of the project. The firm requires a 10.00% return on similar investments. The tax rate is 35%, and the project life is 5 years. There are no other operating expenses. If the equipment is in a 33.00% CCA class, what is the present value of the CCA tax shield? Options $153,510 $157,348 $161,186 $165,024 $168,861arrow_forwardFox Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Unit sales Sales price Variable cost per unit Fixed operating costs This project will require an investment of $15,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project's four-year life. Fox pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project's net present value (NPV) would be under the new tax law. O $20,571.03 O $27,428.04 O $26,285.20 O $22,856.70 Which of the following most closely approximates what the project's net present value (NPV) would be under the new tax law?(Hint: Round your final answer to two decimal places and choose the value that most closely matches your answer.) Year 1 Year 2 Year 3 3,000 3,250 3,300 $17.25…arrow_forwardWendy and Wayne are evaluating a project that requires an initial investment of $792,000 in fixed assets. The project will last for fourteen years, and the assets have no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 143,000 units per year. Price per unit is $43, variable cost per unit is $24, and fixed costs are $800,712 per year. The tax rate is 36 percent, and the required annual return on this project is 12 percent. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 15 percent. Required: (a)Calculate the best-case NPV. (Do not round your intermediate calculations.) (Click to select) (b)Calculate the worst-case NPV. (Do not round your intermediate calculations.) (Click to select) Warrow_forward
- Pear Orchards is evaluating a new project that will require equipment of $249,000. The equipment will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company plans to shut down the project after 4 years. At that time, the equipment could be sold for $67,100. However, the company plans to keep the equipment for a different project in another state. The tax rate is 21 percent. What aftertax salvage value should the company use when evaluating the current project?.arrow_forwardXYZ Corporation is studying a project that would have a ten-year life and would require a $450,000 investment in equipment which has no salvage value. The project would provide net operating income each year as follows for the life of the project (Ignore income taxes.): Sales $ 500,000 Less cash variable expenses 200,000 Less cash fixed expenses 150,000 Less depreciation expenses 45,000 Net operating income $ 105,000 The company's required rate of return is 12%. Compute the payback period for this project Enter your answerarrow_forwardA proposed cost-saving device has an installed cost of $765,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes (MACRS schedule). The required initial net working capital investment is $67,000, the tax rate is 21 percent, and the project discount rate is 9 percent. The device has an estimated Year 5 salvage value of $103,000. What level of pretax cost savings do we require for this project to be profitable? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Pretax cost savingsarrow_forward
- if a company is considering buying a system that costs 450,000 with an estimated 10-year life and a salvage value of 70,000, the estimated operating results with the new machine are, incremental revenue = 180,000, incremental expenses = 123,000 which is made up by, expenses other than depreciation = 85,000, depreciation (straight-line basis) = 38,000, and incremental income = 57,000, and all revenue and expenses other than depreciation use cash, how do I find the annual net cash flow, time of the payback period, return on investment percentage, and the Net present value, discounted at an annual rate of 6% (present value of $1 due in 10 years, discounted at 6%, is 0.558; present value of $1 received annually for 10 years, discounted at 6%, is 7.360)?arrow_forwardA proposed cost-saving device has an installed cost of $825,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes (MACRS schedule). The required initial net working capital investment is $91,000, the tax rate is 23 percent, and the project discount rate is 9 percent. The device has an estimated Year 5 salvage value of $139,000. What level of pretax cost savings do we require for this project to be profitable? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Pretax cost savingsarrow_forwardA proposed project requires an investment of $250,000 and will require an additional $60,000 for upgrades in year five. The income from the project is expected to be $65,000 in years one through four and $50,000 in years six through seven. In year five, revenue to be in ye of the $60,000 spent for upgrades). There is not salvage value. If the external reinvestment rate of 8% is available, what is the rate of return for this project using the ERR method? $250,000 $65,000 $65,000 $65,000 $65,000 TITT $60,000 $50,000 $50,000arrow_forward
- We are evaluating a project that costs $1,920,000, has a 6-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 94,500 units per year. Price per unit is $38.43, variable cost per unit is $23.60, and fixed costs are $839,000 per year. The tax rate is 23 percent and we require a return of 12 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. Best-case NPV Worst-case NPVarrow_forwardWe are evaluating a project that costs $2,130,000, has a 8-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 90,600 units per year. Price per unit is $38.85, variable cost per unit is $23.95, and fixed costs are $860,000 per year. The tax rate is 25 percent, and we require a return of 11 percent on this project. a. Calculate the base-case operating cash flow and NPV. Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. b. What is the sensitivity of NPV to changes in the sales figure? Note: Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161. c. If there is a 450-unit decrease in projected sales, how much would the NPV change? Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. d. What is the sensitivity…arrow_forwardA proposed project requires an investment of $215,000 and will require an additional $25,000 for upgrades in year six. The income from the project is expected to be $64,000 in years one through five and $52,000 in years seven and eight. In year six, revenue equaled expenses (exclusive of the $25,000 spent for upgrades). There is no salvage value. If the external reinvestment rate (ε) of 6% is available, what is the rate of return for this project using the ERR method?arrow_forward
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