Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 6, Problem 31PS
The cost of excess capacity The president’s executive jet is not fully utilized. You judge that its use by other officers would increase direct operating costs by only $20,000 a year and would save $100,000 a year in airline bills. On the other hand, you believe that with the increased use the company will need to replace the jet at the end of three years rather than four. A new jet costs $1.1 million and (at its current low rate of use) has a life of six years. Assume that the company does not pay taxes. All cash flows are
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The Frank Ernst Co. wants to add an additional production line. To do this, the company must spend $100,000 to expand its current building and purchase $1.2 million in new equipment. The building expansion has a salvage value of $80,000 and the equipment has a salvage value of $390,000. This new line is expected to produce 200,000 units with a projected sales price of $4.65 per unit and a variable cost of $2.90 a unit. Gross profit from existing products is expected to decline by $29,000 a year as a result of this addition. Fixed costs are $42,000 annually. The net working capital requirement is $36,000. The company uses straight-line depreciation over the life of the product and requires a 15% rate of return. Taxes are incurred at a rate of 34%. The life of the project is five years. What is the total cash flow
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$553,080
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$589,080
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None of the above.
Adler is replacing its old packing line with a more efficient line. The old line was being depreciated on a straight-line basis at a rate of $20,000 per year. The old machine has a current book value of $100,000. The new line, which costs $910,000, will be depreciated on a 10-year MACRS schedule. The more efficient operation is expected to increase revenues by $50,000 per year and reduce annual operating costs by $80,000. Compute the net cash flows for Adler in year 2. Assume Adler has a marginal tax rate of 40%. Use the rounded MACRS schedule listed below: (10-Year Depreciation Schedule: 10%, 18%, 14%, 12%, 9%, 7%, 7%, 7%, 7%, 6%, 3%)
The management of Kimco is evaluating the possibility of replacing their large mainframe computer with a modern network system that requires much less office space. The network would cost $760,000 (including installation costs) and would save $150,000 per year in net cash flows (accounting for taxes and depreciation) in Year 1-2, $160,000 in year3-4, and $120,000 in year 5 due to efficiency gains. The current mainframe has a remaining book value of $160,000 and would be immediately sold for $120,000. Kimco’s discount rate is 10%, and its tax rate is 25%. Based on NPV, should management install the network system?
Chapter 6 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 6 - Cash flows Which of the following should be...Ch. 6 - Real and nominal flows Mr. Art Deco will be paid...Ch. 6 - Cash flows True or false? a. A projects...Ch. 6 - Depreciation How does the PV of depreciation tax...Ch. 6 - Working capital The following table tracks the...Ch. 6 - Prob. 6PSCh. 6 - Prob. 7PSCh. 6 - Mutually exclusive investments and project lives...Ch. 6 - Replacement decisions Machine C was purchased five...Ch. 6 - Prob. 10PS
Ch. 6 - Prob. 12PSCh. 6 - Working capital Each of the following statements...Ch. 6 - Depreciation Ms. T. Potts, the treasurer of Ideal...Ch. 6 - Project NPV and IRR A project requires an initial...Ch. 6 - Project NPV A widget manufacturer currently...Ch. 6 - Project NPV Marsha Jones has bought a used...Ch. 6 - Project NPV United Pigpen is considering a...Ch. 6 - Project NPV Hindustan Motors has been producing...Ch. 6 - Equivalent annual cash flows As a result of...Ch. 6 - Prob. 25PSCh. 6 - Replacement decisions Hayden Inc. has a number of...Ch. 6 - Prob. 27PSCh. 6 - Prob. 28PSCh. 6 - Prob. 29PSCh. 6 - Prob. 30PSCh. 6 - The cost of excess capacity The presidents...Ch. 6 - Effective tax rates One measure of the effective...Ch. 6 - Equivalent annual costs We warned that equivalent...
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