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77.
Automated Manufacturers uses high-tech equipment to produce specialized
aluminum products for its customers. Each one of these machines costs
$1,480,000 to purchase plus an additional $52,000 a year to operate. The
machines have a 6-year life after which they are worthless. What is the
equivalent annual cost of one these machines if the required return is 16
percent?
78.
Champion Bakers uses specialized ovens to bake its bread. One oven costs
$689,000 and lasts about 4 years before it needs to be replaced. The annual
operating cost per oven is $41,000. What is the equivalent annual cost of an
oven if the required rate of return is 13 percent?
79.
Precision Tool is analyzing two machines to determine which one it should
purchase. The company requires a 15 percent rate of return and uses
straight-line depreciation to a zero book value over the life of its equipment.
Machine A has a cost of $892,000, annual operating costs of $28,200, and a
4-year life. Machine B costs $1,118,000, has annual operating costs of
$19,500, and has a 5-year life. Whichever machine is purchased will be
replaced at the end of its useful life. Precision Tool should purchase
Machine _____ because it lowers the firm's annual cost by approximately
_______ as compared to the other machine.
80.
The Buck Store is considering a project that will require additional inventory
of $216,000 and will increase accounts payable by $181,000. Accounts
receivable are currently $525,000 and are expected to increase by 9 percent
if this project is accepted. What is the project's initial cash flow for net
working capital?
81.
The Card Shoppe needs to maintain 20 percent of its sales in net working
capital. Currently, the shoppe is considering a 6-year project that will
increase sales from its current level of $379,000 to $421,000 the first year
and to $465,000 a year for the following 5 years of the project. What amount
should be included in the project analysis for net working capital in year 6 of
the project?
82.
Home Furnishings Express is expanding its product offerings to reach a
wider range of customers. The expansion project includes increasing the
floor inventory by $430,000 and increasing its debt to suppliers by 70
percent of that amount. The company will also spend $450,000 for a
building contractor to expand the size of its showroom. As part of the
expansion plan, the company will be offering credit to its customers and
thus expects accounts receivable to rise by $90,000. For the project
analysis, what amount should be used as the initial cash flow for net
working capital?
83.
Hollister & Hollister is considering a new project. The project will require
$543,000 for new fixed assets, $218,000 for additional inventory, and
$42,000 for additional accounts receivable. Short-term debt is expected to
increase by $165,000. The project has a 6-year life. The fixed assets will be
depreciated straight-line to a zero book value over the life of the project. At
the end of the project, the fixed assets can be sold for 20 percent of their
original cost. The net working capital returns to its original level at the end
of the project. The project is expected to generate annual sales of $875,000
with costs of $640,000. The tax rate is 34 percent and the required rate of
return is 13 percent. What is the project's cash flow at time zero?
84.
Hollister & Hollister is considering a new project. The project will require
$522,000 for new fixed assets, $218,000 for additional inventory, and
$39,000 for additional accounts receivable. Short-term debt is expected to
increase by $165,000. The project has a 6-year life. The fixed assets will be
depreciated straight-line to a zero book value over the life of the project. At
the end of the project, the fixed assets can be sold for 20 percent of their
original cost. The net working capital returns to its original level at the end
of the project. The project is expected to generate annual sales of $875,000
and costs of $640,000. The tax rate is 34 percent and the required rate of
return is 14 percent. What is the amount of the earnings before interest and
taxes for the first year of this project?
85.
Hollister & Hollister is considering a new project. The project will require
$535,000 for new fixed assets, $218,000 for additional inventory, and
$39,000 for additional accounts receivable. Short-term debt is expected to
increase by $165,000. The project has a 6-year life. The fixed assets will be
depreciated straight-line to a zero book value over the life of the project. At
the end of the project, the fixed assets can be sold for 20 percent of their
original cost. The net working capital returns to its original level at the end
of the project. The project is expected to generate annual sales of $875,000
and costs of $640,000. The tax rate is 31 percent and the required rate of
return is 14 percent. What is the amount of the aftertax cash flow from the
sale of the fixed assets at the end of this project?
86.
Hollister & Hollister is considering a new project. The project will require
$522,000 for new fixed assets, $218,000 for additional inventory, and
$39,000 for additional accounts receivable. Short-term debt is expected to
increase by $165,000. The project has a 6-year life. The fixed assets will be
depreciated straight-line to a zero book value over the life of the project. At
the end of the project, the fixed assets can be sold for 20 percent of their
original cost. The net working capital returns to its original level at the end
of the project. The project is expected to generate annual sales of $875,000
and costs of $640,000. The tax rate is 34 percent and the required rate of
return is 14 percent. What is the cash flow recovery from net working
capital at the end of this project?
87.
Keyser Mining is considering a project that will require the purchase of
$875,000 in new equipment. The equipment will be depreciated straight-line
to a zero book value over the 7-year life of the project. The equipment can
be scraped at the end of the project for 5 percent of its original cost. Annual
sales from this project are estimated at $420,000. Net working capital equal
to 20 percent of sales will be required to support the project. All of the net
working capital will be recouped. The required return is 16 percent and the
tax rate is 34 percent. What is the value of the depreciation tax shield in
year 4 of the project?
88.
Keyser Mining is considering a project that will require the purchase of
$980,000 in new equipment. The equipment will be depreciated straight-line
to a zero book value over the 7-year life of the project. The equipment can
be scraped at the end of the project for 5 percent of its original cost. Annual
sales from this project are estimated at $420,000. Net working capital equal
to 20 percent of sales will be required to support the project. All of the net
working capital will be recouped. The required return is 16 percent and the
tax rate is 35 percent. What is the amount of the aftertax salvage value of
the equipment?
89.
Keyser Mining is considering a project that will require the purchase of
$980,000 in new equipment. The equipment will be depreciated straight-line
to a zero book value over the 7-year life of the project. The equipment can
be scraped at the end of the project for 5 percent of its original cost. Annual
sales from this project are estimated at $420,000. Net working capital equal
to 25 percent of sales will be required to support the project. All of the net
working capital will be recouped. The required return is 16 percent and the
tax rate is 35 percent. What is the recovery amount attributable to net
working capital at the end of the project?
90.
Winnebagel Corp. currently sells 28,200 motor homes per year at $42,300
each, and 11,280 luxury motor coaches per year at $79,900 each. The
company wants to introduce a new portable camper to fill out its product
line. It hopes to sell 19,740 of these campers per year at $11,280 each. An
independent consultant has determined that if Winnebagel introduces the
new campers, it should boost the sales of its existing motor homes by 4,700
units per year, and reduce the sales of its motor coaches by 1,222 units per
year. What is the amount that should be used as the annual sales figure
when evaluating this project?
91.
Consider the following income statement:
What is the amount of the depreciation tax shield?
92.
Consider an asset that costs $176,000 and is depreciated straight-line to
zero over its 11-year tax life. The asset is to be used in a 7-year project; at
the end of the project, the asset can be sold for $22,000. The relevant tax
rate is 30 percent. What is the aftertax cash flow from the sale of this
asset?
93.
Phone Home, Inc. is considering a new 6-year expansion project that
requires an initial fixed asset investment of $5.876 million. The fixed asset
will be depreciated straight-line to zero over its 6-year tax life, after which
time it will be worthless. The project is estimated to generate $5,328,000 in
annual sales, with costs of $2,131,200. The tax rate is 32 percent. What is
the annual operating cash flow for this project?
94.
Phone Home, Inc. is considering a new 5-year expansion project that
requires an initial fixed asset investment of $2.484 million. The fixed asset
will be depreciated straight-line to zero over its 5-year tax life, after which
time it will be worthless. The project is estimated to generate $2,208,000 in
annual sales, with costs of $883,200. The tax rate is 32 percent and the
required return on the project is 11 percent. What is the net present value
for this project?
