Problem 22-15Management of Braden Boats, Inc. is considering an expansion in the firm's product line that requires the purchase of an additional $185,000 in equipment with installation costs of $16,000 and removal expenses of $2,000 (Note: the removal expenses areconsidered terminal cash flows and not associated with the installation of the new equipment). The equipment and installation costs will be depreciated over five years using straight-line depreciation. The expansion is expected to increase earnings before depreciationand taxes as follows:Years 1 and 2$67,000Years 3 and 4$60,000Year 5$65,000The firm's income tax rate is 30 percent and the weighted-average cost of capital is 9 percent. Based on the net present value method of capital budgeting, should management undertake this project? Use Appendix B to answer the question. Use a minus sign toenter a negative value, if any. Round your answer to the nearest dollar.NPV: $The firm shouldmake the investment.

Part 2: Explanation:Step 1: Calculate the initial investment:Initial investment = Equipment cost +…

Answered: Problem 22-15 Management of Braden…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter10: Project Cash Flows And Risk

Section: Chapter Questions

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REPLACEMENT ANALYSIS St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from 24,000 to 46,000 per year. The new machine will cost 80,000; and it will have an estimated life of 8 years and no salvage value. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The applicable corporate tax rate is 40%, and the firm's WACC is 10%. The old machine has been fully depreciated and has no salvage value. Should the old riveting machine be replaced by the new one? Explain your answer.
Exercise 9-16 The Blue Spruce Company is planning to purchase $496,800 of equipment with an estimated seven-year life and no estimated salvage value. The company has projected the following annual cash flows for the investment. Year Projected Cash Flows 1 $202,000 2 152,000 3 105,000 4 50,400 5 50,400 6 42,500 7 42,500 Total $644,800 (a) Calculate the payback period for the proposed equipment purchase. Assume that all cash flows occur evenly throughout the year. Payback period years and months. (b) If Blue Spruce requires a payback period of three years or less, should the company make this investment? The company shouldshould not make this investment.
Exercise 14-40 (Algo) Impact of New Asset on Performance Measures (LO 14-2) The Plastics Division of Minock Manufacturing currently earns $2.86 million and has divisional assets of $26 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $5,508,000 and will have a yearly cash flow of $1,469,000. The asset will be depreciated using the straight-line method over a five-year life and is expected to have no salvage value. Divisional performance is measured using ROI with beginning-of-year net book values in the denominator. The company's cost of capital is 7 percent. Ignore taxes. Required: a. What is the divisional ROI before acquisition of the new asset? b. What is the divisional ROI in the first year after acquisition of the new asset? Note: For all requirements, enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1). a. ROI before acquisition b. ROI after acquisition %
Exercise 24-2 (Algo) Payback period, equal cash flows, and depreciation adjustment LO P1 Quary Company is considering an investment in machinery with the following information. Initial investment Useful life Salvage value Expected sales per year Required A Required B (a) Compute the investment's annual income and annual net cash flow. (b) Compute the investment's payback period. $ 380,000 Complete this question by entering your answers in the tabs below. Annual Amounts 9 years $ 20,000 19,000 units Expenses Materials, labor, and overhead (except depreciation) Depreciation-Machinery Selling, general, and administrative expenses Selling price per unit Compute the investment's annual income and annual net cash flow. Income Net cash flow Required A $ Income 0 $ Cash Flow Required B > 0 $ 85,500 40,000 9,500 $ 10
Problem 6-4 Calculating Project Cash Flow from Assets Esfandairi Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.29 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life. The project is estimated to generate $1,790,000 in annual sales, with costs of $700,000. The project requires an initial investment in net working capital of $410,000, and the fixed asset will have a market value of $420,000 at the end of the project. a. If the tax rate is 21 percent, what is the project's Year O net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.) b. If the required return is 12 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places,…
Problem 22-15 Management of Braden Boats, Inc. is considering an expansion in the firm's product line that requires the purchase of an additional $160,000 in equipment with installation costs of $15,000 and removal expenses of $4,500 (Note: the removal expenses are considered terminal cash flows and not associated with the installation of the new equipment). The equipment and installation costs will be depreciated over five years using straight-line depreciation. The expansion is expected to increase earnings before depreciation and taxes as follows: Years 1 and 2 $64,000 Years 3 and 4 $51,000 The firm's income tax rate is 30 percent and the weighted-average cost of capital is 6 percent. Based on the net present value method of capital budgeting, should management undertake this project? Use Appendix B to answer the question. Use a minus sign to enter a negative value, if any. Round your answer to the nearest dollar NPV: $ The firm -Select- Year 5 $50,000 make the investment.
Problem 6-26 Project Analysis and Inflation Shinoda Manufacturing, Incorporated, has been considering the purchase of a new manufacturing facility for $630,000. The facility is to be fully depreciated on a straightline basis over seven years. It is expected to have no resale value at that time. Operating revenues from the facility are expected to be $455,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 3 percent. Production costs at the end of the first year will be $300,000, in nominal terms, and they are expected to increase at 4 percent per year. The real discount rate is 6 percent. The corporate tax rate is 24 percent. Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV
Problem 5: Platypus Corporation's managers have presented the company's management with two proposals for expanding its production capacity. Based on the following two different alternatives, which proposal should they adopt? Cost of the Equipment Required Project 1 $250,000 Working Capital Investment Required 0 Annual Cash Inflows $65,000 Maintenance cost in year 4 $15,000 Maintenance cost in year 6 0 Salvage Value of Equipment in 8 Years $12,000 Project 2 $100,000 $150,000 $50,000 0 $15,000 0 Both projects have a life of 8 years. In 8 years Project 2's working capital will be released and be available to invest in other projects. The company has a discount rate of 16% Required: 1) Calculate the net present value for each project. 2) Based solely on the net present value of the project, which alternative would you recommend the company invest in? Why?
Problem 6-11 Calculating NPV Medavoy Company is considering a new project that complements its existing business. The machine required for the project costs $4.2 million. The marketing department predicts that sales related to the project will be $2.43 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated to zero over its 4-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 30 percent of sales. The company also needs to add net working capital of $160,000 immediately. The additional net working capital will be recovered in full at the end of the project's life. The corporate tax rate is 22 percent and the required return for the project is 11 percent. What is the value of the NPV for this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,…
ts 19 Riverview Company is evaluating the proposed acquisition of a new production machine. The machine's base price is $200,000, and installation costs would amount to $28,000. Also, $10,000 in net working capital would be required at installation. The machine will be depreciated for 3 years using simplified straight line depreciation. The machine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine in place for 2 years. At the end of the second year, the machine will be sold for $100,000. Riverview has a cost of capital of 12% and a marginal tax rate of 34%. What is the NPV of the project? O $12.155 O $3,875 O-$9,783 O $19,016 $9.555
Problem 6-11 Calculating NPV Medavoy Company is considering a new project that complements its existing business. The machine required for the project costs $5.0 million. The marketing department predicts that sales related to the project will be $3.07 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated to zero over its 4-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 30 percent of sales. The company also needs to add net working capital of $240,000 immediately. The additional net working capital will be recovered in full at the end of the project's life. The corporate tax rate is 23 percent and the required return for the project is 11 percent. What is the value of the NPV for this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,…
QUESTION 10 A project will produce operating cash flows of $57,000 a year for 3 years. During the life of the project, inventory will be lowered by $10,000 and accounts receivable will increase by $20,000. Accounts payable will decrease by $5,000. The project requires the purchase of equipment at an initial cost of $90,000. The equipment will be salvaged at the end of the project creating a $17,000 after-tax cash inflow. At the end of the project, net working capital will return to its normal level. What is the net present value of this project given a required return of 12%? $48,772.08 $54,681.35 $56,209.19 $42,908.17 $44,141.41

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