Fundamentals Of Corporate Finance, 9th Edition
9th Edition
ISBN: 9781260052220
Author: Richard Brealey; Stewart Myers; Alan Marcus
Publisher: McGraw-Hill Education
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Chapter 9, Problem 15QP
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To determine:
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The management of Ballard MicroBrew is considering the purchase of an automated bottling machinefor $120,000. The machine would replace an old piece of equipment that costs $30,000 per year to operate. The new machine would cost $12,000 per year to operate. The old machine currently in use couldbe sold now for a scrap value of $40,000. The new machine would have a useful life of 10 years with nosalvage value.Required:Compute the simple rate of return on the new automated bottling machine.
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Polarlech Inc. is considering producing a new widget. The production equipment, costing $12 million, will depreciate over a six-year period with no salvage value. The widget's retail price is $250, with an anticipated annual sales volume of 150,000 units. Fixed costs are projected at $900,000 annually, and variable costs amount to $150 per widget. Initial project startup requires a net working capital investment of $1,200,000. No additional working capital is needed during the project. The applicable tax rate is 25%.
Calculate the IRRs and NPVs for this project using the WACC under the following scenario:
PolarTech Inc. can obtain debt funding at 8 percent. Its marginal income tax rate is 25 percent. The yield on US Treasury securities is 3 percent. The market risk premium is 6.0 percent, and the firm's beta is 2. It has a targeted debt-to-equity ratio of 1:1 (50 percent debt, 50 percent equity).
In a bio-based material recycling company, the operation managers are considering a twin-screw extruder with a price of 12,000 OMR and another 2,000 OMR will be spent for shipping and installation of the extruder. The estimated net income generated from this machine is 3,500 OMR per year. The extruder will be used for 5 years, and then it will be sold for an estimated market value of 2,500 OMR. The extruder MARCS property class is 5 years. If the effective income tax rate (t) is 40% and the after-tax MARR is 10%.
(a) What is the after-tax IRR for this project? (use trial and error procedure and GDS)
(b) Should this extruder be purchased by the company?
Chapter 9 Solutions
Fundamentals Of Corporate Finance, 9th Edition
Ch. 9 - Prob. 1QPCh. 9 - Prob. 2QPCh. 9 - Prob. 3QPCh. 9 - Prob. 4QPCh. 9 - Prob. 5QPCh. 9 - Prob. 6QPCh. 9 - Prob. 7QPCh. 9 - Prob. 8QPCh. 9 - Prob. 10QPCh. 9 - Prob. 12QP
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- Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?arrow_forwardAustins cell phone manufacturer wants to upgrade their product mix to encompass an exciting new feature on their cell phone. This would require a new high-tech machine. You are excited about his new project and are recommending the purchase to your board of directors. Here is the information you have compiled in order to complete this recommendation: According to the information, the project will last 10 years and require an initial investment of $800,000, depreciated with straight-line over the life of the project until the final value is zero. The firms tax rate is 30% and the required rate of return is 12%. You believe that the variable cost and sales volume may be as much as 10% higher or lower than the initial estimate. Your boss understands the risks but asks you to explain the alternatives in a brief memo to the board, Write a memo to the Board of Directors objectively weighing out the pros and cons of this project and make your recommendation(s).arrow_forwardIf a copy center is considering the purchase of a new copy machine with an initial investment cost of $150,000 and the center expects an annual net cash flow of $20,000 per year, what is the payback period?arrow_forward
- The Ham and Egg Restaurant is considering an investment in a new oven that has a cost of $60,000, with annual net cash flows of $9,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether or not you would recommend that Ham and Egg invest in this oven.arrow_forwardRoberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is 2,293,200. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows: Required: 1. Compute the projects payback period. 2. Compute the projects accounting rate of return. 3. Compute the projects net present value, assuming a required rate of return of 10 percent. 4. Compute the projects internal rate of return.arrow_forwardShrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA. The production line would be set up in unused space in the main plant. The machinerys invoice price would be approximately 200,000, another 10,000 in shipping charges would be required, and it would cost an additional 30,000 to install the equipment. The machinery has an economic life of 4 years, and Shrieves has obtained a special tax ruling that places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of 25,000 after 4 years of use. The new line would generate incremental sales of 1,000 units per year for 4 years at an incremental cost of 100 per unit in the first year, excluding depreciation. Each unit can be sold for 200 in the first year. The sales price and cost are both expected to increase by 3% per year due to inflation. Further, to handle the new line, the firms net working capital would have to increase by an amount equal to 12% of sales revenues. The firms tax rate is 25%, and its overall weighted average cost of capital, which is the risk-adjusted cost of capital for an average project (r), is 10%. Define incremental cash flow. (1) Should you subtract interest expense or dividends when calculating project cash flow? (2) Suppose the firm spent 100,000 last year to rehabilitate the production line site. Should this be included in the analysis? Explain. (3) Now assume the plant space could be leased out to another firm at 25,000 per year. Should this be included in the analysis? If so, how? (4) Finally, assume that the new product line is expected to decrease sales of the firms other lines by 50,000 per year. Should this be considered in the analysis? If so, how?arrow_forward
- A retrofitted space-heating system is being considered for a small office building. the $110,000 retrofitted space-heating system was projected to save $30,000 per year in electrical power and be worth $8,000 at the end of the six-year study period. Use the FW method to determine whether the project is still economically justified if the system has zero market value after six years. The MARR is 15% per year.arrow_forwardSuppose that you have just completed the mechanical design of a high-speed automated palletizer that has an investment cost of $3,000,000. The existing palletizer is quite old and has no salvage value. The market value for the new palletizer is estimated to be $300,000 after seven years. One million pallets will be handled by the palletizer each year during the seven-year expected project life. What net savings per pallet (i.e., total savings less expenses) will have to be generated by the palletizer to justify this purchase in view of a MARR of 20% per year?arrow_forward
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