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Capital Budgeting

IN CLASS PROBLEMS: Class let's see if we can also apply the concepts in Chapter 12 to the following problems.
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1) The capital budgeting director of Analytical Systems Inc. (ASI) is evaluating a new project that would decrease operating costs by $30,000 per year without affecting revenues. The project's cost is $50,000. The project will be depreciated using the MACRS method over its 3-year class life. It will have a zero salvage value after 3 years. The marginal tax rate of ASI is 35 percent, and the project's cost of capital is 12 percent. What is the project's NPV?
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2) Your firm has a marginal tax rate of 40 percent and a cost of capital of 14 percent. You are performing a capital budgeting analysis on a new project that will cost $500,000. The project is expected to have a useful life of 10 years, although its MACRS class life is only 5 years. The project is expected to increase the firm's net income by $61,257 per year and to have a salvage value of $35,000 at the end of 10 years. What is the project's NPV?
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3) The Board of Directors of American Brewing is considering the acquisition of a new still. The still is priced at $600,000, but would require $60,000 in transportation costs and $40,000 for installation. The still has a useful life of 10 years, but will be depreciated over its 5 year MACRS life. It is expected to have a salvage value of $10,000 at the end of 10 years. The still would increase revenues by $120,000 per year and increase yearly operating costs by $20,000 per year. Additionally, the still would require a $30,000 increase in net working capital. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 10 percent. What is the NPV of the still?
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4) As financial vice president, you are evaluating a potential new project. The VP-manufacturing and VP-sales have provided the following real revenue, operating cost, and depreciation data, all sated in constant Year 0 dollars:
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Year____________Revenue____________Cost_____________Depreciation
0_______________$0________________$90,000____________$0
1________________40,000____________10,000____________30,000
2________________40,000____________10,000____________30,000
3________________40,000____________10,000____________30,000
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The cost of capital to the firm is 14 percent, including the current inflation premium. You estimate that the reported real costs will escalate by 10 percent per year over the project's life, starting at t=0, while revenues will increase by only 5 percent per year. The firm's marginal tax rate is 40 percent. The $90,000 cost in Year 0 is the net after-tax cost of the project, while the $40,000 annual revenues and $10,000 annual costs are before tax. The project has no salvage value and does not require a change in net working capital. What is the project's NPV?

Solution Summary

The solution explains some questions relating to capital budgeting

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