EBK FOUNDATIONS OF FINANCE
10th Edition
ISBN: 9780135160473
Author: KEOWN
Publisher: PEARSON CO
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Chapter 11, Problem 12SP
a)
Summary Introduction
To determine: The initial outlay related with this project.
b)
Summary Introduction
To determine: The annual after-tax cash flow related with this project for year 1, and year 2 through 9.
c)
Summary Introduction
To determine: The terminal cash flow in year 10.
d)
Summary Introduction
To determine: Whether the project accepted or not.
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QRW Corp. needs to replace an old machine with a new, more efficient model. The new machine being considered will result in an increase in earnings before interest and taxes of $70,000 per year. The purchase price is $200,000, and it would cost an additional $10,000 to properly install the machine. In addition, to properly operate the machine, inventory must be increased by $10,000. This machine has an expected life of 10 years, with no salvage value. Assume that a straight-line depreciation method being used and that this machine is being depreciated down to zero, the marginal tax rate is 34%, and a required rate of return of 15%.
(i) Solve for the value of the initial outlay associated with this project.
(ii) Solve for the value of annual after-tax cash flows for this project from years 1 through 9.
QRW Corp. needs to replace an old machine with a new, more efficient model. The new machine being considered will result in an increase in earnings before interest and taxes of $70,000 per year. The purchase price is $200,000, and it would cost an additional $10,000 to properly install the machine. In addition, to properly operate the machine, inventory must be increased by $10,000. This machine has an expected life of 10 years, with no salvage value. Assume that a straight-line depreciation method being used and that this machine is being depreciated down to zero, the marginal tax rate is 34%, and a required rate of return of 15%.
(i) Solve for the value of the initial outlay associated with this project.
(ii) Solve for the value of annual after-tax cash flows for this project from years 1 through 9
(iii) Solve for the value of terminal cash flow in year 10 (annual after-tax cash flow in year 10 plus any additional cash flows associated with the termination of the project).…
b) Magen's Bakery, Inc., is considering the purchase of a new cake mixing equipment for $200,000.
This would result in an increase in earnings before interest and taxes of $50,000 per year. To operate
the machine efficiently, worker's training session would cost $10,000 after taxes. It would cost
another $10,000, after taxes, to get equipment to be ready for use. Acquiring this project would
cause changes in the working capital. The accountant has provided the following figures for the
calculation of the working capital:
Accounts receivables
Inventory
Accounts payables
Without the project
$25 000
$35 000
$50 000
With the project
$55 000
$70 000
$65 000
This machine has an expected life of 10 years, after which it would have no salvage value. Finally, to
purchase the new machine, it appears that the firm would have to borrow $80,000 at 10 percent
interest from its local bank, resulting in additional interest payments of $8,000 per year. Assume the
use of the simplified straight-line…
Chapter 11 Solutions
EBK FOUNDATIONS OF FINANCE
Ch. 11.A - Prob. 1MCCh. 11.A - Prob. 2MCCh. 11 - Prob. 1RQCh. 11 - Prob. 2RQCh. 11 - If a project requires an additional investment in...Ch. 11 - Prob. 4RQCh. 11 - Prob. 5RQCh. 11 - Prob. 6RQCh. 11 - Prob. 1SPCh. 11 - (Relevant cash flows) Captins Cereal is...
Ch. 11 - Prob. 3SPCh. 11 - Prob. 4SPCh. 11 - Prob. 5SPCh. 11 - Prob. 6SPCh. 11 - Prob. 7SPCh. 11 - Prob. 9SPCh. 11 - Prob. 10SPCh. 11 - Prob. 11SPCh. 11 - Prob. 12SPCh. 11 - Prob. 15SPCh. 11 - (Real options and capital budgeting) You have come...Ch. 11 - (Real options and capital budgeting) Go-Power...Ch. 11 - (Real options and capital budgeting) McDoogals...Ch. 11 - (Risk-adjusted NPV) The Hokie Corporation is...Ch. 11 - (Risk-adjusted discount rates and risk classes)...Ch. 11 - Prob. 1MCCh. 11 - Prob. 2MCCh. 11 - Prob. 3MCCh. 11 - Prob. 7MCCh. 11 - Prob. 8MCCh. 11 - Prob. 9MCCh. 11 - Should the project be accepted? Why or why not?Ch. 11 - Prob. 11MCCh. 11 - Prob. 12MCCh. 11 - Prob. 13MCCh. 11 - Prob. 14MC
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Repeat the net present value analysis using this information, the information in Requirement 3, and a 12 percent discount rate. 5. Given the outcomes of the previous four requirements, comment on the importance of providing accurate inputs for assessing investments in automated manufacturing systems.arrow_forward
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