1.A drill press costs $30,000 and is expected to have a 10 year life. The drill press will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. This machine is expected to reduce the firm’s cash operating costs by $4,500 per year. If the firm is in the 40 percent marginal tax bracket, determine the annual net cash flows generated by the drill press.
2.Felix Industries purchased a grinder 5 years ago for $15,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero.
It could be sold now for $6,000. The firm is considering selling it and purchasing a new one. The new grinder would cost $25,000 installed and would be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. The company’s marginal tax rate is 40%. Determine the net investment if the old grinder is sold and the new one purchased.
3.Degnan Dance Company, Inc., a manufacturer of dance and exercise apparel, is considering replacing an existing piece of equipment with a more sophisticated machine.
The following information is given as of today.
|Facts | | |Existing Machine | |Proposed Machine | |Costs | 100,000.00 | | 150,000.00 | |Installation | 10,000.00 | | 20,000.00 | |MACRS |5 – Years | |5 – Years | |Market Value | 105,000.00 | | | |Purchased |2 years ago | | |
|Forecasted Revenues | |Year |Existing Machine | |Proposed Machine | |1 | 160,000.00 | | 170,000.00 | |2 | 150,000.00 | | 170,000.00 | |3 | 140,000.00 | | 170,000.00 | |4 | 140,000.00 | | 170,000.00 | |5 | 140,000.00 | | 170,000.00 | | | | | | |Forecasted Expenses (No Depreciation) | |Year |Existing Machine | |Proposed Machine | |1 | 104,000.00 | | 110,500.00 | |2 | 104,000.00 | | 110,500.00 | |3 | 104,000.00 | | 110,500.00 | |4 | 104,000.00 | | 110,500.00 | |5 | 104,000.00 | | 110,500.00 |
The firm pays 40 percent taxes on ordinary income and capital gains.
A.Given the information in Table 1, compute the initial investment.
B.Given the information in Table 2, compute the incremental annual cash flows.
C.Given the information from Table 1, assuming 13% rate of return, what is Degnan Dance Company’s Inc. NPV on the proposed machine.
4.Compute the value of a share of common stock of a company whose most recent dividend was $2.50 and is expected to grow at 3 percent per year for the next 5 years, after which the dividend growth rate will increase to 6 percent per year indefinitely. Assume 10 percent required rate of return.
5.Henn Corp, Ltd. is examining two investment projects as a part of its expansion plan for the coming year. These two projects are not mutually exclusive. The cost of Project A is $12,950 while the second project (B) is expected to cost $18,625. Henn’s cost of capital (required rate of return) is 11.5 %. Expected annual cash flows are projected to be as follows:
|Year |Project A |Project B |
|1 | 3,250.00 | 6,850.00 |
|2 | 3,250.00 | 6,850.00 |
|3 | 3,250.00 | 6,850.00 |
|4 | 3,250.00 | 6,850.00 |
|5 | 3,250.00 | 6,850.00 |
Each project will last an estimated 5 years with no remaining significant scrap value. Determine the IRR and the NPV for each of these two projects. What should Henn Corp decide about each proposed project.
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