Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The compan
Evaluate the proposed acquisition of a new computer. The computer's price is $40,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net operating working capital of $2,000. The computer would increase the firm's before-tax revenues by $20,000 per year but would also increase o
The President of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $40,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net operating working capital of $2,000. The computer would increase the firm's before-tax reven
Senior management is considering two proposals to expand the product line. Expansion of the product line requires a new facility and production team. Senior management hired a consulting firm to research the potential product lines. Lava Rocks would like to make this product line for at least 5 years (so the evaluation is for 5
You are considering purchasing an apartment building. Once you renovate the apartment building you will rent the apartments. You plan to keep the building for 7 years and then sell it at the end of year 7 for the estimated fare market value. Purchase Price $10,000,00
Congratulations! Your work on understanding and managing the costs and profitability of Lava Rocks cycles has resulted in record-breaking sales volume and profits. As a result, senior management is considering two proposals to expand the product line. Expansion of the product line requires a new facility and production team. Sen
Your uncle has given you three alternatives for your inheritance. You can have $5,000 now; $1,000 per year for the next eight years; or $12,000 at the end of eight years. You assume that you could earn 11% interest annually. 1. Which inheritance alternative would be best? Why? 2. Would your decision be different if you
Fair Oil Fair Oil owns a tract of land that may be rich with oil. Fair must decide whether or not to drill on this land. Fair estimates that the project would cost $25 million today (t = 0), and generate positive net cash flows of $10 million a year at the end of each of the next four years (t = 1, 2, 3, and 4). While the com
Graphic Systems purchased a computerized measuring device two years ago for $80,000. It falls into the five-year category for MACRS depreciation. The equipment can currently be sold for $28,400. A new piece of equipment will cost $210,000. It also falls into the five-year category for MACRS depreciation. Assume the new equipme
Oklahoma Instruments Oklahoma Instruments (OI) is considering a project that has an up-front cost of $250,000. The project's subsequent cash flows critically depend on whether its products become the industry standard. There is a 50 percent chance that the products will become the industry standard, in which case the projec
Blair Bookstores is thinking about expanding its facilities. In considering the expansion, Blair's finance staff has obtained the following information: The expansion will require the company to purchase today (t = 0) $5 million of equipment. The equipment will be depreciated over the following four years at the following rat
Trent Transport, a U.S. based company, is considering expanding its operations into a foreign country. The required investment at Time = 0 is $10 million. The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the next two years, and then a possible terminal value of $8 million. In addition, due
I'm very confused on how to calculate this problem. The formula I have is for OCF: OCF= (P-V) (Q-FC) (1-t) + t (D) I'm not sure what to plug in here and from there I'm missing the formula for NPV. Please help me. A project aims to supply Detroit with 50,000 tons of machine screws annually for automobile production. You wil
A company is looking at a new sausage system with an installed cost of $678,600. This cost will be depreciated straight-line to zero over the project's 10-year life, at the end of which the sausage system can be scrapped for $104,400. The sausage system will save the firm $208,800 per year in pretax operating costs, and the syst
Consider a project to supply a company with 50,000 tons of widgets annually for production. You will need an initial $1,750,000 investment in equipment to get the project started; the project will last for 8 years. The accounting department estimates that annual fixed costs will be $450,000 and that variable costs should be $18
Deer Valley Lodge, a ski resort in the Wasatch Mountains of Utah, has plans to eventually add five new chairlifts. Suppose that one lift costs $2 million, and preparing the slope and installing the lift costs another $1.3 million. The lift will allow 300 additional skiers on the slopes, but there are only 40 days a year when the
70. An all equity firm is analyzing a potential project which will require an initial aftertax cash outlay of 50K and after tax cash inflows of 6K per year for 10 years. In addition, this project will have an after tax salvage value of 10K at the end of Year 10. If the risk free rte is 6 % the return on an averge stock is 10 %
Superior Manufacturing is thinking of launching a new product. The company expects to sell $950,000 of the new product in the first year and $1,500,000 each year thereafter. Direct costs including labor and materials will be 55% of sales. Indirect incremental costs are estimated at $80,000 a year. The project requires a new
Question -For independent projects, is it true that if PI>0, then NPV>0, and IRR>K? Is my answer correct? PI= (I+NPV) / I where I=Investment if PI>0 then {(I+NPV) / I}>0 which means NPV> -I meaning NPV>0 where <0> is the limit of I NPV=0={C1 / (1+IRR)}-I={C1 / (1+k)}-I where C1 is the expected future net cash flo
Shelby Inc. is considering two projects which have the following cash flows: Year Project 1 Cash Flow Project 2 Cash Flow 0 -$2,000 -$1,900 1 500 1,100 2 700 900 3 800 800 4 1,000 600 5 1,100 400 At what cost of capital would the two projects have the same net pres
What is the payback period on each of the following projects? project time 0 1 3 4 a -5000 1000 1000 3000 0 b -1000 0 1000 2000 3000 c -5000 1000 1000 3000 5000 Given that you wish to use the payback rule with a cutoff period
(See attached file for full problem description) 1) Leverage: Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows: Sinclair Boswell Capital Structure Debt @12% $600,000 $-
A business is considering an investment in one of two mutually exclusive projects. The discount rate used for Project A is 12%. Futher, Project A cost 15K and it would be depreciated using MACRS. It is expected to have an after-tax salvage value of 5K at the end of 6 years and to produce after-tax cash flows (including a depr
Section 1, Questions 1 - 6 are designed to test understanding of the fundamentals of valuation and how to estimate the value of a project, division or firm over a forecast period and how to estimate the residual value. Section 2, Questions 1-16 are designed to test understanding of the growing perpetuity model. (See attach
The Moon Company is contemplating the purchase of a new machine to replace an old machine. The following data are available concerning this investment possibility: New machine: Purchase price now $50,000 Annual cash operating costs $20,000 Useful life 7 years Salvage value at the end of seven years . $ 3,000 O
A manufacturer of electronic components in the 34% marginal tax bracket, is considering the purchase of a new fully automated machine to replace an older manually operated one. The machine being replaced now five years old, and originally had an expected life of 10 years, was being depreciated using the simplified straight line
Johnny's Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $20,000 and will be depreciated in an asset class which carries a CCA rate of 30 percent. It will be sold for scrap metal after 3 years for $5,000. The grill will have no effect on revenues but will save Johnny's $10,000 in energy expen
Deer Valley Lodge, a ski resort in the Wasatch Mountains of Utah, has plans to eventually add five new chairlifts. Suppose that one lift costs $2 million, and preparing the slope and installing the lift costs another $1.3 million. The lift will allow 300 additional skiers on the slopes, but there are only 40 days a year when the
The present worth of $5,000 in year 3, $10,000 in year 5, and $10,000 in year 8 at an interest rate of 12% per year is closest to? a. 12,100 b. 13,300 c. 14,900 d. 16,200
NPV and IRR. A project that costs $3,000 to install will provide annual cash flows of $800 for each of the next 6 years. Is this project worth pursuing if the discount rate is 10 percent? How high can the discount rate be before you would reject the project?