Chapter 12 2 You Are Considering The Purchase One

30.

You are considering the purchase of one of two machines used in your manufacturing

plant. Machine A has a life of two years, costs $100 initially, and then $150 per year in

maintenance costs. Machine B costs $200 initially, has a life of three years, and requires

$120 in annual maintenance costs. Either machine must be replaced at the end of its life

with an equivalent machine. Which is the better machine for the firm? The discount rate is

12 percent and the tax rate is zero.

31.

You are considering the purchase of one of two machines used in your manufacturing

plant. Machine A has a life of two years, costs $20,000 initially, and then $4,000 per year in

maintenance costs. Machine B costs $25,000 initially, has a life of three years, and

requires $3,500 in annual maintenance costs. Either machine must be replaced at the end

of its life with an equivalent machine. Which is the better machine for the firm? The

discount rate is 14 percent and the tax rate is zero.

32.

Your company has spent $200,000 on research to develop a new computer game. The firm

is planning to spend $40,000 on a machine to produce the new game. Shipping and

installation costs of the machine will be capitalized and depreciated; they total $5,000. The

machine has an expected life of five years, a $25,000 estimated resale value, and falls

under the MACRS five-year class life. Revenue from the new game is expected to be

$300,000 per year, with costs of $100,000 per year. The firm has a tax rate of 35 percent,

an opportunity cost of capital of 14 percent, and it expects net working capital to increase

by $50,000 at the beginning of the project. What will be the operating cash flow for year

one of this project?

33.

Your firm needs a machine which costs $100,000, and requires $25,000 in maintenance for

each year of its three-year life. After three years, this machine will be replaced. The

machine falls into the MACRS three-year class life category. Assume a tax rate of 35

percent and a discount rate of 14 percent. What is the depreciation tax shield for this

project in year 3?

34.

Your firm needs a machine which costs $500,000, and requires $10,000 in maintenance for

each year of its three-year life. After three years, this machine will be replaced. The

machine falls into the MACRS three-year class life category. Assume a tax rate of 35

percent and a discount rate of 15 percent. What is the depreciation tax shield for this

project in year 3?

35.

Your firm needs a machine which costs $90,000, and requires $30,000 in maintenance for

each year of its five-year life. After five years, this machine will be replaced. The machine

falls into the MACRS five-year class life category. Assume a tax rate of 35 percent and a

discount rate of 13 percent. What is the depreciation tax shield for this project in year 5?

36.

Your firm needs a machine which costs $125,000, and requires $5,000 in maintenance for

each year of its three-year life. After three years, this machine will be replaced. The

machine falls into the MACRS three-year class life category. Assume a tax rate of 35

percent and a discount rate of 10 percent. If this machine can be sold for $15,000 at the

end of year 3, what is the after-tax salvage value?

37.

Your firm needs a machine which costs $60,000, and requires $15,000 in maintenance for

each year of its five-year life. After five years, this machine will be replaced. The machine

falls into the MACRS five-year class life category. Assume a tax rate of 35 percent and a

discount rate of 10 percent. If this machine can be sold for $8,000 at the end of year 5,

what is the after-tax salvage value?

38.

You have been asked by the president of your company to evaluate the proposed

acquisition of a new special-purpose truck for $50,000. The truck falls into the MACRS

three-year class, and it will be sold after three years for $5,000. Use of the truck will

require an increase in NWC (spare parts inventory) of $2,000. The truck will have no effect

on revenues, but it is expected to save the firm $25,000 per year in before-tax operating

costs, mainly labor. The firm’s marginal tax rate is 40 percent. What will the operating cash

flow for this project be during year 2?

39.

You have been asked by the president of your company to evaluate the proposed

acquisition of a new special-purpose truck for $70,000. The truck falls into the MACRS

three-year class, and it will be sold after three years for $5,000. Use of the truck will

require an increase in NWC (spare parts inventory) of $10,000. The truck will have no

effect on revenues, but it is expected to save the firm $32,000 per year in before-tax

operating costs, mainly labor. The firm’s marginal tax rate is 40 percent. What will the

operating cash flow for this project be during year 2?

40.

You have been asked by the president of your company to evaluate the proposed

acquisition of a new special-purpose truck for $250,000. The truck falls into the MACRS

three-year class, and it will be sold after three years for $50,000. Use of the truck will

require an increase in NWC (spare parts inventory) of $5,000. The truck will have no effect

on revenues, but it is expected to save the firm $80,000 per year in before-tax operating

costs, mainly labor. The firm’s marginal tax rate is 40 percent. What will the operating cash

flow for this project be during year 3?

41.

You have been asked by the president of your company to evaluate the proposed

acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS

three-year class, and it will be sold after three years for $14,000. Use of the truck will

require an increase in NWC (spare parts inventory) of $3,000. The truck will have no effect

on revenues, but it is expected to save the firm $20,000 per year in before-tax operating

costs, mainly labor. The firm’s marginal tax rate is 40 percent. What will the operating cash

flow for this project be during year 3?

42.

You have been asked by the president of your company to evaluate the proposed

acquisition of a new special-purpose truck for $75,000. The truck falls into the MACRS

three-year class, and it will be sold after three years for $13,000. Use of the truck will

require an increase in NWC (spare parts inventory) of $5,000. The truck will have no effect

on revenues, but it is expected to save the firm $20,000 per year in before-tax operating

costs, mainly labor. The firm’s marginal tax rate is 40 percent. What will the operating cash

flow for this project be during year 3?

43.

You are evaluating a project for your company. You estimate the sales price to be $500 per

unit and sales volume to be 2000 units in year 1; 3000 units in year 2; and 1500 units in

year 3. The project has a three-year life. Variable costs amount to $300 per unit and fixed

costs are $200,000 per year. The project requires an initial investment of $325,000 in

assets that will be depreciated straight-line to zero over the three-year project life. The

actual market value of these assets at the end of year 3 is expected to be $50,000. NWC

requirements at the beginning of each year will be approximately 25 percent of the

projected sales during the coming year. The tax rate is 34 percent and the required return

on the project is 12 percent. What is the operating cash flow for the project in year 2?

44.

You are evaluating a project for your company. You estimate the sales price to be $50 per

unit and sales volume to be 5,000 units in year 1; 10,000 units in year 2; and 2,500 units in

year 3. The project has a three-year life. Variable costs amount to $10 per unit and fixed

costs are $75,000 per year. The project requires an initial investment of $25,000 in assets

that will be depreciated straight-line to zero over the three-year project life. The actual

market value of these assets at the end of year 3 is expected to be $5,000. NWC

requirements at the beginning of each year will be approximately 20 percent of the

projected sales during the coming year. The tax rate is 34 percent and the required return

on the project is 13 percent. What change in NWC occurs at the end of year 1?

45.

You are evaluating a project for your company. You estimate the sales price to be $10 per

unit and sales volume to be 3,000 units in year 1; 10,000 units in year 2; and 1,000 units in

year 3. The project has a three-year life. Variable costs amount to $3 per unit and fixed

costs are $25,000 per year. The project requires an initial investment of $50,000 in assets

that will be depreciated straight-line to zero over the three-year project life. The actual

market value of these assets at the end of year 3 is expected to be $10,000. NWC

requirements at the beginning of each year will be approximately 25 percent of the

projected sales during the coming year. The tax rate is 34 percent and the required return

on the project is 15 percent. What change in NWC occurs at the end of year 1?

46.