Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
65)
Epiphany is worried about the reliability of the sales forecast. How sensitive is the project's NPV to a 10%
change in sales.
66)
What is the NPV of the Epiphany's project?
67)
How does scenario analysis differ from sensitivity analysis?
68)
What is sensitivity analysis?
69)
What is an opportunity cost? Should it be included in the incremental cash flows for a project? Why or why
not?
Use the information for the question(s) below.
Kinston Industries is considering investing in a machine that will cost $125,000 and will last for three years. The machine
will generate revenues of $120,000 each year and the cost of goods sold will be 50% of sales. At the end of year three the
machine will be sold for $15,000. The appropriate cost of capital is 10% and Kinston is in the 35% tax bracket.
70)
Assume that Kinston's new machine will be depreciated straight line to a salvage value of $5,000 at the end of
year three. What is the after-tax salvage value of this project?
71)
What is a sunk cost? Should it be included in the incremental cash flows for a project? Why or why not?
Use the information for the question(s) below.
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three
years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a
residual value of $0.
The cane manufacturing machine will result in sales of 2,000 canes in year 1. Sales are estimated to grow by 10% per year
each year through year three. The price per cane that Sisyphean will charge its customers is $18 each and is to remain
constant. The canes have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net
working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of
its annual sales in accounts receivable, 9% of its annual sales in inventory, and 6% of its annual sales in accounts payable.
The firm is in the 35% tax bracket, and has a cost of capital of 10%.
72)
Calculate the total Free Cash Flows for each of the three years for the Sisyphean Corporation's new project.
Use the information for the question(s) below.
Kinston Industries is considering investing in a machine that will cost $125,000 and will last for three years. The machine
will generate revenues of $120,000 each year and the cost of goods sold will be 50% of sales. At the end of year three the
machine will be sold for $15,000. The appropriate cost of capital is 10% and Kinston is in the 35% tax bracket.
73)
Assume that Kinston's new machine will be depreciated straight line to a salvage value of $5,000 at the end of
year three. What is the NPV for this project?
Answer Key
Testname: C7
Answer Key
Testname: C7
Answer Key
Testname: C7
Answer Key
Testname: C7
Answer Key
Testname: C7
41
