You were reviewing a proposal to buy production equipment for $253,000 in 2017. The equipment is a 20% CCA class asset. At the end of 5 years, it has an estimated salvage value of $32,000. If the equipment is purchased, the company will save $65,400 of annual operating costs, before-tax. The company's marginal tax rate is 40% and its cost of capital is 15%. Do not round when calculating PV of CCA tax shield, etc. Calculate the project's NPV using the six-step approach. Would you recommend approval for the project? Enter the following amounts to the nearest dollar without dollar sign or commas, e.g. 15000, if negative, -15000. 1) Initial investment: 2) PV of project savings: 3) PV of CCA:

You were reviewing a proposal to buy production equipment for $253,000 in 2017. The equipment is a 20% CCA class asset. At the end of 5 years, it has an estimated salvage value of $32,000. If the equipment is purchased, the company will save $65,400 of annual operating costs, before-tax. The company's marginal tax rate is 40% and its cost of capital is 15%. Do not round when calculating PV of CCA tax shield, etc. Calculate the project's NPV using the six-step approach. Would you recommend approval for the project? Enter the following amounts to the nearest dollar without dollar sign or commas, e.g. 15000, if negative, -15000. 1) Initial investment: 2) PV of project savings: 3) PV of CCA:

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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B2B Company is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment costs $360,000 and has a 12-year life and no salvage value. B2B Company requires at least an 8% return on this investment. The expected annual income for each year from this equipment follows: (PV of $1. FV of $1. PVA of $1, and FVA of $1) Note: Use appropriate factor(s) from the tables provided. Sales of new product Expenses Materials, labor, and overhead (except depreciation) Depreciation-Equipment Selling, general, and administrative expenses Income (a) Compute the net present value of this investment. (b) Should the investment be accepted or rejected on the basis of net present value? Complete this question by entering your answers in the tabs below. Required A Required B Compute the net present value of this investment. Note: Round your present value factor to 4 decimals and other final answers to the nearest whole dollar. Years 1 through 12 Initial…
B2B Company is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment costs $382,400 and has a 4-year life and no salvage value. B2B Company requires at least an 9% return on this investment The expected annual income for each year from this equipment follows: (PV of $1. EV of $1. PVA of $1, and EVA of $1) (Use appropriate factor(s) from the tables provided.) Sales of new producti Expenses Materials, labor, and overhead (except depreciation) Depreciation Equipment Selling, general, and administrative expenses Income $239,000 84,000 95,600 23,900 $35,500 (a) Compute the net present value of this investment. (b) Should the investment be accepted or rejected on the basis of net present value? Complete this question by entering your answers in the tabs below. Required A Required B Should the investment be accepted or rejected on the basis of net present value? Should the investment be accepted or rejected on the basis of net…
Sad Company is considering the purchase of a new machine that would cost $80,000. The machine would have a useful life of 8 years. Sad Company plans on using straight-line depreciation with an estimated salvage value of $0. Sad Company has a hurdle rate of 12% and is subject to an income tax rate of 80%. The annual cash income is estimated to be $50,000. PV . 1- The Accounting Rate of Return (AROR) is: 10 % 11 % 12 % 9 % 8 % 2-The Net Present Value (NPV) is: $10,424 $9,424 $11,424 $8,424 $11,424 3-The Profitability Index (PI) is: 1.02 1.12 1.22 0.92 0.82 The Payback period is: A. 4.044 years B. 4.144 years C. 4.244 years D. 4.344 years E. 4.444 years Using interpolation, the Internal Rate of Return (IRR) is: 14.4 % 13.4 % 12.4 % 15.4 % 16.4 %
B2B Company is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment costs $379,200 and has a 12-year life and no salvage value. B2B Company requires at least an 8% return on this investment. The expected annual income for each year from this equipment follows: (PV of $1, FV of $1, PVA of $1, and FVA of $1) Note: Use appropriate factor(s) from the tables provided. Sales of new product Expenses Materials, labor, and overhead (except depreciation) Depreciation-Equipment Selling, general, and administrative expenses Income (a) Compute the net present value of this investment. (b) Should the investment be accepted or rejected on the basis of net present value? Complete this question by entering your answers in the tabs below. Required A Required B Compute the net present value of this investment. Note: Round your present value factor to 4 decimals and other final answers to the nearest whole dollar. Years 1 through 12 Net present…
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B2B Company is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment costs $380,800 and has a 8-year life and no salvage value. B2B Company requires at least an 10% return on this investment. The expected annual income for each year from this equipment follows: (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Sales of new product Expenses Materials, labor, and overhead (except depreciation) Depreciation-Equipment Selling, general, and administrative expenses Income Complete this question by entering your answers in the tabs below. (a) Compute the net present value of this investment. (b) Should the investment be accepted or rejected on the basis of net present value? Required A Required B Years 1 through 8 Compute the net present value of this investment. (Round your present value factor to 4 decimals and other final answers to the nearest whole dollar.) Net present value…
Assume XYZ wishes to purchase a machine for $500k that will produce widgets which will sell for $50 each. Assume variable costs of $30/unit and other fixed costs will be $100k per year. Assume a tax rate of 25%, and assume that assets purchased will be in a CCA class with a rate of 20%. Assume further the assets purchased will have a salvage value of $20,000 after the 5 year life of the project, and that interest rates are 10%. a. Compute the after-tax contribution margin. b. Find the PV break-even volume.
Suppose you are considering an investment project that requires $800.000, has a six-year life, and has a salvage value of $100,000. Sales volume is projected 10 be 65,000 units per year. Price per un it is $63, variable cos! per unit is $42, and fixed costs are $532,000 per year. The depreciation method is a five-year MACRS. 1l1e tax rate is 35% and you ex pect a 20% relurn on this investment. a-Determine the break-even sales volume. b-Calculate the cash flows of the base case over six years and its NPW. c-lf the sales price per unit increases to $400, what is the required break-even volume? d-Suppose the projections given for price, sales volume, variable costs, and fixed costs are all accurate to within ± 15%. What would be the NPW figures of the best-case and worst-case scenarios?
B2B Company is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment costs $379,200 and has a 12-year life and no salvage value. B2B Company requires at least an 8% return on this investment. The expected annual income for each year from this equipment follows: (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Sales of new product $ 237,000 Expenses Materials, labor, and overhead (except depreciation) 83,000 Depreciation—Equipment 31,600 Selling, general, and administrative expenses 23,700 Income $ 98,700 (a) Compute the net present value of this investment.(b) Should the investment be accepted or rejected on the basis of net present value?
Holmes Manufacturing is considering a new machine that costs $250,000 and would reducepre-tax manufacturing costs by $90,000 annually. Holmes would use the 3-year MACRSmethod to depreciate the machine, and management thinks the machine would have avalue of $25,000 at the end of its 5-year operating life. The applicable depreciation ratesare 33%, 45%, 15%, and 7%. Net operating working capital would increase by $25,000initially, but it would be recovered at the end of the project's 5-year life. Holmes'smarginal tax rate is 40%, and a 13% WACC is appropriate for the project.a. Calculate the project's NPV. Round your answer to the nearest cent.b. Calculate the project's IRR. Round your answer to two decimal places.
BigCo is considering leasing the new equipment that it requires, for $146000 a year, payable in advance. The cost of the equipment is $775000, and will last for 5 years. The expected scrap value at the end of 5th year is $140000. Assume that the equipment will be fully depreciated under straightline method. The tax rate is 35%, the cost of equity is 13% and the cost of debt is 10%. i. What is the net cost of buying? ii. What is the net cost of leasing? iii. What is the net advantage of leasing (NAL)? iv. What is the maximum lease payment that would make BigCo indifferent between leasing or buying?
The Lumber Yard is considering adding a new product line that is expected to increase annual sales by $352,000 and expenses by $244,000. The project will require $153,000 in fixed assets that will be depreciated using the straight-line method to a zero book value over the 9-year life of the project. The company has a marginal tax rate of 21 percent. What is the depreciation tax shield? Multiple Choice O $20,145 $3,570 $8.213 $22.680 ER 540

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