Project #46244 - Chapter 12

1. 

Mom’s Cookies, Inc., is considering the purchase of a new cookie oven. The original cost of the old oven was $37,000; it is now five years old, and it has a current market value of $16,000. The old oven is being depreciated over a 10-year life toward a zero estimated salvage value on a straight-line basis, resulting in a current book value of $18,500 and an annual depreciation expense of $3,700. The old oven can be used for six more years but has no market value after its depreciable life is over. Management is contemplating the purchase of a new oven whose cost is $26,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new oven are $4,100 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a 5-year life, and the cost of capital is 10 percent. Assume a 35 percent tax rate.

 

What will the cash flows for this project be? (Note that the $37,000 cost of the old oven is depreciated over ten years at $3,700 per year. The half-year convention is not used for the old oven. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places.)

 

Year 0   1   2   3   4   5   6  
FCF              

 

2. 

Your company is considering a new project that will require $794,000 of new equipment at the start of the project. The equipment will have a depreciable life of 8 years and will be depreciated to a book value of $146,000 using straight-line depreciation. The cost of capital is 11 percent, and the firm’s tax rate is 30 percent.

 

Estimate the present value of the tax benefits from depreciation. (Round your answer to 2 decimal places.)

 

  Present value   

 

3. 

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 3-year class, and it will be sold after three years for $21,000. 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 $16,900 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 34 percent.

 

What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

 

Year 0   1   2   3  
FCF        

 

 

4.

 

You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $24,000 to purchase and which will have OCF of –$3,200 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $32,500 to purchase and which will have OCF of –$1,650 annually throughout that vehicle’s expected 4-year life. Both cars will be worthless at the end of their life. You intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future.

    

If the business has a cost of capital of 13 percent, calculate the EAC. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

     

  
  Scion's EAC   
  Toyota's EAC   

  

Which one should you choose?
Toyota
Scion

 

 

5.

Your firm needs a computerized machine tool lathe which costs $47,000 and requires $11,700 in maintenance for each year of its 3-year life. After three years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 34 percent and a discount rate of 11 percent.

 

Calculate the depreciation tax shield for this project in year 3. (Round your answer to 2 decimal places.)

 

  Depreciation tax shield   

 

6.

You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $420 per unit and sales volume to be 1,200 units in year 1; 1,325 units in year 2; and 1,000 units in year 3. The project has a 3-year life. Variable costs amount to $235 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $159,000 in assets, which will be depreciated straight-line to zero over the 3-year project life. The actual market value of these assets at the end of year 3 is expected to be $33,000. 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 39 percent and the required return on the project is 10 percent.

 

What change in NWC occurs at the end of year 1?

 

     

 

7.

 

Your firm needs a computerized machine tool lathe which costs $53,000 and requires $12,300 in maintenance for each year of its 3-year life. After three years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 34 percent and a discount rate of 12 percent.

 

If the lathe can be sold for $5,300 at the end of year 3, what is the after-tax salvage value? (Round your answer to 2 decimal places.)

 

  Salvage value after tax   

 

8.

You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $69,500, has a 5-year life, and has an annual OCF (after tax) of –$11,200 per year. The Keebler CookieMunster costs $96,000, has a 7-year life, and has an annual OCF (after tax) of –$9,200 per year.

 

If your discount rate is 12 percent, what is each machine’s EAC? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

 

  
  Pillsbury 707   
  Keebler CookieMunster   

 

9. 

You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $440 per unit and sales volume to be 1,000 units in year 1; 1,500 units in year 2; and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to $245 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $177,000 in assets, which will be depreciated straight-line to zero over the 3-year project life. The actual market value of these assets at the end of year 3 is expected to be $39,000. 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 35 percent and the required return on the project is 11 percent.

 

What is the operating cash flow for the project in year 2?

 

  Operating cash flow   

 

10. 

 

You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $490 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to $270 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $192,000 in assets, which will be depreciated straight-line to zero over the 3-year project life. The actual market value of these assets at the end of year 3 is expected to be $44,000. 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 10 percent. (Use SL depreciation table)

 

What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places.)

 

Year 0   1   2   3  
  Total cash flow        

Subject Business
Due By (Pacific Time) 11/09/2014 12:00 am
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