Q.1
Flatte Restaurant is considering the purchase of a $7,500 soufflé maker. The soufflé maker has an economic economic life of five five years and ill ill !e fully depreciated !y the straight"lin straight"lin The machine ill produce #,00 soufflés per year, ith each costing $%.#5 to make and priced at $ &ssume that the discount rate is #' percent and the ta( rate is ' percent. )hould the company make the purchase* Answer r
#'+ 0
#
%
'
5
Revenue (penses -epreciation /T /T1#"T2 /T1#"T23-ep 4ape( F4F 6
Q.2
The est 8anufacturing 4ompany is considering a ne investment. Financial pro9ections for the investment are ta!ulated here. The corporate ta( rate is 5 percent. &ssume all sales revenue is received in cash, all operating costs and income ta(es are paid in cash, and all cash flos occur at the end of the year. &ll net orking capital is recovered at the end of the pro9ec
Investment Sales revenue Operatin !"sts #epre!iati"n et %"r&in !apital spen'in
Year 0 $27,400
300.00
Year 1
Year 2
Year 3
Year 3
$12,900 2700.00 6850.00
$14,000 2800.00 6850.00
$15,200 2900.00 6850.00
$11,200 2100.00 6850.00
200.00
225.00
150.00
?
a24ompute the incremental net income of the investment for each year. !24ompute the incremental cash flos of the investment for each year. c2)uppose the appropriate discount rate is #% percent. >hat is the 6 of the pro9ect* Answer
r /nvestment )ales revenue ?perating costs -epreciation /T1#"T23-6 et orking orking capital spending F4F 6
#%+ :ear 0 :ear # :ear % :ear :ear ' %7,'00 #%,;00 #',000 #5,%00 ##,%00 %700 %<00 %;00 %#00 =<50 =<50 =<50 =<50 00
%00
%%5
#50 *
Q.3
-on @nder oomerang, /nc., is considering a ne three"year e(pansion pro9ect that reAuires an i The fi(ed asset ill !e depreciated straight"line to Bero over its three"year ta( life, after hich it il ith costs of $'<5,000. The ta( rate is 5 percent and reAuired return is #% percent. >hat is the pro9ectCs 6* Answer
r /T1#"t23-6
#%+
or 1R"4?)T21#"T23-6T /nvestment 6
Q.4
/n the previous pro!lem, suppose the pro9ect reAuires an intitial investment in net orking capital o $%<5,000 and the fi(ed asset ill have a market value of $%%5,000 at the end of the pro9ect. >hat is the pro9ectDs :ear 0 net cash flo* :ear #* :ear %* :ear * >ht is the ne 6* Answer
:ear 0
:ear #
:ear %
:ear
e method. 5.%5.
t.
nitial fi(ed asset investment of $#.=5 million. ll !e orthless. The pro9ect is estimated to generate $#.%' million in annual sales,
f
Q.6
:our firm is contemplating the purchase of a ne $50,000 computer"!ased order entry system. The system ill !e depreciated straight"line to Bero over its five"year life. /t ill !e orth $50,000 at the end of that time. :ou ill save $#<=,000 !efore ta(es per year in order processing costs, and you ill !e a!le to reduce orking capital !y $<5,000 1this is a one"time reduction2. /f the ta( rate is 5 percent, hat is the /RR for this pro9ect* Answer
Q.9
Eoell 6etroleum is considering a ne pro9ect that complements its e(isting !usiness. The machine reAuired for the pro9ect cost $.; million. The marketing department predicts that sales the pro9ect ill !e $%.5 million per year for the ne(t four years, after hich the market ill cease to The machine ill !e depreciated don to Bero over its four"year economic life using the straight"line method. 4ost of goods sold and operating e(penses related to the pro9ect are predicted to !e %5 per of sales. Eoell also needs to add net orking capital of $#50,000 immedietly. The additional net o capital ill !e recovered in full at the end of the pro9ectDs life. The corporate ta( rate is 5 percent. Th reAuired rate of return for Eoell is # percent. )hould Eoell proceed ith the pro9ect* Answer
:ear 0
:ear #
:ear %
:ear
:ear '
Q.10
:ou are evaluating to different silicon afer milling machines. The Techron / costs $%'5,000, has a three"year life, and has preta( operating costs of $;,000 per year. The Techron // costs $#5,000, has a five"year life, and has preta( operating costs of $'<,000 per y milling machines, use straight"line depreciation to Bero over the pro9ectDs life and assume a salvage
/f your ta( rate is 5 percent and your discount rate is ; percent 4ompute the &4 for !oth machines. >hich do you prefer* >hy* Answer
related to (ist. ent king e
ar. For !oth alue of $%0,000.
Q.12
Eagar /ndustrial )ystems 4ompany 1E/)42 is trying to decide !eteen to different conveyor !elt sy )ystem & costs $%;0,000, has a four"year life, and reAuires $<;,000 in preta( annual operating costs )ystem costs $'#0,000, has a si("year life, and reAuires $7;,000 in preta( annual operating costs. oth systems are to !e depreciated straight"line to Bero over their lives and ill have Bero salvage v >hichever system is chosen, it ill not !e replaced hen it ears out. The ta( rate is ' percent and discount rate is 7.5 percent. hich system should the firm choose* Answer
Q.14
andalay /ndustries is considering the purchase of a ne machine for the production of late(. 8achine & costs $,#00,000 and ill last for = years. aria!le costs are 5 percent of sales, and fi(e 8achine costs $=,#00,000 and ill last for ; years. aria!le costs for this machine are 0 percent The sales for each machine ill !e $#.5 million per year. The reAuired return is #0 percent and the t oth machines ill !e depreciated on a straight"line !asis /f the company plans to replace the machine hen it ears out on a perpetual !asis, hich machine Answer
stems. . lue. the
costs are $%0',000 per year. f sales and fi(ed costs are $#=5,000 per year. a( rate is 5 percent. should you choose*
Q.17
tonic /nc. is considering an investment of $;5,000 in an asset ith an economic life of 5 years. T estimates that the nominal annual cash revenues and e(penses at the end of the first year ill !e $ and $<%,000, respectively. oth revenues and e(penses ill gro thereafter at the annual inflation percent. tonic ill use the straight"line method to depreciate its asset to Bero over five years. The value of the asset is estimated to !e $'5,000 in nominal terms at that time. The one"time net orki capital investment of $#5,000 is reAuired immediately and ill !e recovered at the end of the pro9ec corporate cash flos are su!9ect to a ' percent ta( rate. >hat is the pro9ectCs total nominal cash flo from assets for each year* Answer
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Sales ()penses #epre!iati"n (*I+ (*I+-1+/ apital spen'in
Q.19
ridgton olf &cademy is evaluating different golf practice eAuipment. The G-imple"8a(G eAuipment costs $=',000, has a year life, and costs $7,500 per year to operate. The relevant discount rate is #% percent. &ssume that the straight"line depreciation method is used and that the eAuipment is fully depreciated to Bero. Furthermore, assume the eAuipment has a salvage value of $7,500 at the end of the pro9ectDs life. the relevant ta( rate is ' percent. &ll cash flos occur at the end of the year. Find &4 of this eAuipment. Answer
Q.20
Right6rice /nvestors, /nc., is considering the purchase of a $'#5,000 computer ith an economic lif years. The computer ill !e fully depreciated over five years using the straight"line method.
The market value of the computer ill !e $50,000 in five years. The computer ill replace ' office com!ined annual salaries are $#%0,000. The machine ill also immediately loer the firmCs reAuire orking capital !y $<0,000. This amount of net orking capital ill need to !e replaced once the m is sold. The corporate ta( rate is ' percent. The appropriate discount rate is ; percent. is it orthhile to !uy computer Answer
e firm %55,000 ate of alvage g t. &ll
e of five
mployees hose net chine
Q.32
:our company has !een approached to !id on a contract to sell #5,000 voice recognition 1R2 computer key!o -ue to techonological improvements, !eyond that time they ill !e outdated and no sales ill !e possi!le. The !e depreciated on a straight"line !asis to a Bero salvage value. 6roduction ill reAuire an investment in net o end of the pro9ect, and the eAuipment can !e sold for $%00,000 at the end of production. Fi(ed costs are $700,000 per year, and varia!le costs are $'< per unit. /n addition to the contract, you feel you additional units to companies in other countries over the ne(t four years, respectively, at a price of $#'5. This reAuired return is # percent. &dditionally, the president of the company ill undertake the pro9ect only if it has >hat !id price should you set for contract* Answer
Year 1
Year 2
Year 3
Year 4
Q.33
)uppose e are thinking a!out replacing an old computer ith a ne one. The old one cost us $'50, The ne machine ill !e depreciated straight"line to Bero over its five year life. /t ill pro!a!ly !e o The old computer is !eing depreciated at a rate of $;0,000 per year. /t ill !e completely ritten off i . /f e donCt replace it no, e ill have to replace it in to years. >e can sell it no for $%0,000H in The ne machine ill save us $<5,000 per year in operating costs. The ta( rate is < percent, and th a2 )uppose e recognise that if e donDt replace the computer no, e ill !e replacing it in % years 1E/TI >hat e effectively have here is a decision either to GinvestG in the old computer"!y not sellin notice that the to investments have uneAual lives2 !2 )uppose e consider only hether e should replace the old computer no ithout orrying a!o >hat are the relevant cash flos* )hould e replace it or not* 1E/TI consider the net change in firmsDs after ta( cash flos if e do the replacement2
ards a year for four years. eAuipment necessary for the production ill cost $.' and ill rking capital of $75,000 to !e returned at the r company can sell ',000, #%,000, #',000 and 7,000 rice is fi(ed. The ta( rate is '0 percent, and the an 6 of $#00,000.
,000H the ne one ill cost $5<0,000. th a!out $#0,000 after 5 yrs. three years to years, it ill pro!a!ly !e orth $=0,000. e discount rate is #' percent . )hould e replace no or should e ait* it"or to invest in ne one. ut hatDs going to happen in to years.