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29. You are evaluating two different machines. Machine A costs $25,000, has a five-year life,
and has an annual OCF (after tax) of -$6,000 per year. Machine B costs $30,000, has a seven-
year life, and has an annual OCF (after tax) of -$5,500 per year. If your discount rate is 10
percent, using EAC which machine would you choose?
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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?
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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. 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 is the operating cash
flow for the project in year 2?
47. You are evaluating a project for your company. You estimate the sales price to be $25 per
unit and sales volume to be 4,000 units in year 1; 7,000 units in year 2; and 1,000 units in year 3.
The project has a three-year life. Variable costs amount to $10 per unit and fixed costs are
$50,000 per year. The project requires an initial investment of $10,000 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 $1,000. NWC requirements at the beginning of each
year will be approximately 10 percent of the projected sales during the coming year. The tax rate
is 34 percent and the required return on the project is 10 percent. What change in NWC occurs at
the end of year 1?
