XYZ Company plans to invest $1 million in a new plant which is expected to produce a uniform annual net benefit before tax of $300,000 in terms of the base-year dollars over the next 5 years. The plant has a salvage value of S100,000 at the end of 5 years and the depreciation allowance is based on the straight-line depreciation method. The corporate tax rate is 34%, and the after-tax MARR specified by the firm is 10%. determine whether the investment is worthwhile. Year (F/P, i, n) (P/F, i, n) (F/A, i, n) (A/F, i, n) (A/P, i, n) (P/A, i, n) 1. 1000 1. 2100 0. 9091 0. 8264 0. 7513 0. 6830 0. 6209 0. 5645 1. 0000 0. 4762 0. 3021 0. 2155 0. 1638 0. 1296 0. 1054 1. 0000 1. 1000 0. 5762 1 0.9091 2. 1000 1. 7355 3 1. 3310 3. 3100 0.4021 2. 4869 0. 3155 0. 2638 0. 2296 0. 2054 0. 1874 0. 1736 4 1. 4641 4. 6410 3. 1699 1. 6105 6. 1051 3. 7908 1.7716 7.7156 4. 3553 7 1.9487 0.5132 9. 4872 4. 8684 0. 4665 0. 4241 8 2. 1436 11. 4359 0.0874 5. 3349 9. 2. 3579 13. 5795 0. 0736 5. 7590

XYZ Company plans to invest $1 million in a new plant which is expected to produce a uniform annual net benefit before tax of $300,000 in terms of the base-year dollars over the next 5 years. The plant has a salvage value of S100,000 at the end of 5 years and the depreciation allowance is based on the straight-line depreciation method. The corporate tax rate is 34%, and the after-tax MARR specified by the firm is 10%. determine whether the investment is worthwhile. Year (F/P, i, n) (P/F, i, n) (F/A, i, n) (A/F, i, n) (A/P, i, n) (P/A, i, n) 1. 1000 1. 2100 0. 9091 0. 8264 0. 7513 0. 6830 0. 6209 0. 5645 1. 0000 0. 4762 0. 3021 0. 2155 0. 1638 0. 1296 0. 1054 1. 0000 1. 1000 0. 5762 1 0.9091 2. 1000 1. 7355 3 1. 3310 3. 3100 0.4021 2. 4869 0. 3155 0. 2638 0. 2296 0. 2054 0. 1874 0. 1736 4 1. 4641 4. 6410 3. 1699 1. 6105 6. 1051 3. 7908 1.7716 7.7156 4. 3553 7 1.9487 0.5132 9. 4872 4. 8684 0. 4665 0. 4241 8 2. 1436 11. 4359 0.0874 5. 3349 9. 2. 3579 13. 5795 0. 0736 5. 7590

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 3P

See similar textbooks

Similar questions

The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given here. The company’s cost of capital is 10%. Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life? Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
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?
Gardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further Instructions on internal rate of return in Excel, see Appendix C.
Postman Company is considering two independent projects. One project involves a new product line, and the other involves the acquisition of forklifts for the Materials Handling Department. The projected annual operating revenues and expenses are as follows: Required: Compute the after-tax cash flows of each project. The tax rate is 40 percent and includes federal and state assessments.
Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial $5 million investment in net operating working capital. The company’s tax rate is 25%. What is the initial investment outlay? The company spent and expensed $150,000 on research related to the new product last year. What is the initial investment outlay? Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. What is the initial investment outlay?