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[61].Fool Proof Software considering a new project whose data shown

Question : [61].Fool Proof Software considering a new project whose data shown : 1416416

 

[61].Fool Proof Software is considering a new project whose data are shown below.  The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4.  Revenues and other operating costs are expected to be constant over the project's 10-year expected life.  What is the Year 1 cash flow?

 

Equipment cost (depreciable basis)$65,000

Sales revenues, each year$60,000

Operating costs (excl. depreciation)$25,000

Tax rate35.0%

 

a.$30,258

b.$31,770

c.$33,359

d.$35,027

e.$36,778

 

[62].Your company, CSUS Inc., is considering a new project whose data are shown below.  The required equipment has a 3-year tax life, and the accelerated rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4.  Revenues and other operating costs are expected to be constant over the project's 10-year expected operating life.  What is the project's Year 4 cash flow?

 

Equipment cost (depreciable basis)$70,000

Sales revenues, each year$42,500

Operating costs (excl. depreciation)$25,000

Tax rate35.0%

 

a.$11,814

b.$12,436

c.$13,090

d.$13,745

e.$14,432

 

[63].Temple Corp. is considering a new project whose data are shown below.  The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value.  No change in net operating working capital would be required.  Revenues and other operating costs are expected to be constant over the project's 3-year life.  What is the project's NPV?

 

Risk-adjusted WACC10.0%

Net investment cost (depreciable basis)$65,000

Straight-line depreciation rate33.3333%

Sales revenues, each year$65,500

Annual operating costs (excl. depreciation)$25,000

Tax rate35.0%

 

a.$15,740

b.$16,569

c.$17,441

d.$18,359

e.$19,325

 

[64].Liberty Services is now at the end of the final year of a project.  The equipment originally cost $22,500, of which 75% has been depreciated.  The firm can sell the used equipment today for $6,000, and its tax rate is 40%.  What is the equipment’s after-tax salvage value for use in a capital budgeting analysis?  Note that if the equipment's final market value is less than its book value, the firm will receive a tax credit as a result of the sale.

 

a.$5,558

b.$5,850

c.$6,143

d.$6,450

e.$6,772

 

[65].Marshall-Miller & Company is considering the purchase of a new machine for $50,000, installed.  The machine has a tax life of 5 years, and it can be depreciated according to the depreciation rates below.  The firm expects to operate the machine for 4 years and then to sell it for $12,500.  If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4?

 

YearDepreciation Rate

10.20

20.32

30.19

40.12

50.11

60.06

 

a.$ 8,878

b.$ 9,345

c.$ 9,837

d.$10,355

e.$10,900

 

[66].TexMex Food Company is considering a new salsa whose data are shown below.  The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no change in net operating working capital would be required.  Revenues and other operating costs are expected to be constant over the project's 3-year life.  However, this project would compete with other TexMex products and would reduce their pre-tax annual cash flows.  What is the project's NPV?  (Hint:  Cash flows are constant in Years 1-3.)

 

WACC10.0%

Pre-tax cash flow reduction for other products (cannibalization)-$5,000

Investment cost (depreciable basis)$80,000

Straight-line depreciation rate33.333%

Annual sales revenues$67,500

Annual operating costs (excl. depreciation)-$25,000

Tax rate35.0%

 

a.$3,636

b.$3,828

c.$4,019

d.$4,220

e.$4,431

[67].Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown below.  The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new office.  The equipment for the project would be depreciated by the straight-line method over the project's 3-year life, after which it would be worth nothing and thus it would have a zero salvage value.  No change in net operating working capital would be required, and revenues and other operating costs would be constant over the project's 3-year life.  What is the project's NPV?  (Hint: Cash flows are constant in Years 1-3.)

 

WACC10.0%

Opportunity cost$100,000

Net equipment cost (depreciable basis)$65,000

Straight-line depreciation rate for equipment33.333%

Annual sales revenues$123,000

Annual operating costs (excl. depreciation)$25,000

Tax rate35%

 

a.$10,521

b.$11,075

c.$11,658

d.$12,271

e.$12,885

 

[68].Desai Industries is analyzing an average-risk project, and the following data have been developed.  Unit sales will be constant, but the sales price should increase with inflation.  Fixed costs will also be constant, but variable costs should rise with inflation.  The project should last for 3 years, it will be depreciated on a straight-line basis, and there will be no salvage value.  No change in net operating working capital would be required.  This is just one of many projects for the firm, so any losses on this project can be used to offset gains on other firm projects.  What is the project's expected NPV?

 

WACC10.0%

Net investment cost (depreciable basis)$200,000

Units sold50,000

Average price per unit, Year 1$25.00

Fixed oper. costs excl. depreciation (constant)$150,000

Variable oper. cost/unit, Year 1 $20.20

Annual depreciation rate33.333%

Expected inflation rate per year5.00%

Tax rate40.0%

 

a.$15,925

b.$16,764

c.$17,646

d.$18,528

e.$19,455

 

[69].Poulsen Industries is analyzing an average-risk project, and the following data have been developed.  Unit sales will be constant, but the sales price should increase with inflation.  Fixed costs will also be constant, but variable costs should rise with inflation.  The project should last for 3 years, it will be depreciated on a straight-line basis, and there will be no salvage value.  No change in net operating working capital would be required.  This is just one of many projects for the firm, so any losses on this project can be used to offset gains on other firm projects. The marketing manager does not think it is necessary to adjust for inflation since both the sales price and the variable costs will rise at the same rate, but the CFO thinks an inflation adjustment is required.  What is the difference in the expected NPV if the inflation adjustment is made versus if it is not made?

 

WACC10.0%

Net investment cost (depreciable basis)$200,000

Units sold50,000

Average price per unit, Year 1$25.00

Fixed oper. costs excl. depreciation (constant)$150,000

Variable oper. cost/unit, Year 1$20.20

Annual depreciation rate33.333%

Expected inflation4.00%

Tax rate40.0%

 

a.$12,018

b.$12,650

c.$13,316

d.$13,982

e.$14,681

 

[70].Foley Systems is considering a new investment whose data are shown below.  The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require additional net operating working capital that would be recovered at the end of the project's life.  Revenues and other operating costs are expected to be constant over the project's life.  What is the project's NPV?  (Hint: Cash flows from operations are constant in Years 1 to 3.)

 

WACC10.0%

Net investment in fixed assets (basis)$75,000

Required net operating working capital$15,000

Straight-line depreciation rate33.333%

Annual sales revenues$75,000

Annual operating costs (excl. depreciation)$25,000

Tax rate35.0%

 

a.$23,852

b.$25,045

c.$26,297

d.$27,612

e.$28,993

 

[71].Thomson Media is considering some new equipment whose data are shown below.  The equipment has a 3-year tax life and would be fully depreciated by the straight-line method over 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closed down.  Also, additional net operating working capital would be required, but it would be recovered at the end of the project's life.  Revenues and other operating costs are expected to be constant over the project's 3-year life.  What is the project's NPV?

 

WACC10.0%

Net investment in fixed assets (depreciable basis)$70,000

Required net operating working capital$10,000

Straight-line depreciation rate33.333%

Annual sales revenues$75,000

Annual operating costs (excl. depreciation)$30,000

Expected pre-tax salvage value$5,000

Tax rate35.0%

 

a.$20,762

b.$21,854

c.$23,005

d.$24,155

e.$25,363

 

[72].Florida Car Wash is considering a new project whose data are shown below.  The equipment to be used has a 3-year tax life, would be depreciated on a straight-line basis over the project's 3-year life, and would have a zero salvage value after Year 3.  No change in net operating working capital would be required.  Revenues and other operating costs will be constant over the project's life, and this is just one of the firm's many projects, so any losses on it can be used to offset profits in other units.  If the number of cars washed declined by 40% from the expected level, by how much would the project's NPV change?  (Hint: Note that cash flows are constant at the Year 1 level, whatever that level is.)

 

WACC10.0%

Net investment cost (depreciable basis)$60,000

Number of cars washed2,800

Average price per car$25.00

Fixed oper. costs (excl. depreciation)$10,000

Variable oper. cost/unit (i.e., VC per car washed)$5.375

Annual depreciation$20,000

Tax rate35.0%

 

a.-$28,939

b.-$30,462

c.-$32,066

d.-$33,753

e.-$35,530

 

[73].Aggarwal Enterprises is considering a new project that has a cost of $1,000,000, and the CFO set up the following simple decision tree to show its three most-likely scenarios.  The firm could arrange with its work force and suppliers to cease operations at the end of Year 1 should it choose to do so, but to obtain this abandonment option, it would have to make a payment to those parties.  How much is the option to abandon worth to the firm?

 

WACC = 11.5%       Dollars in Thousands  NPV ThisProb. ×

t = 0  t = 1           t = 2       t = 3     State                 NPV

Prob. = 20%$800.0$800.0$800.0$938.1$187.6

Prob. = 60%-$1,000$520.0$520.0$520.0$259.8$155.9

Prob. = 20%-$200.0-$200.0-$200.0-$1,484.5-$296.9

Exp. NPV = $ 46.6

 

a.$55.1

b.$58.0

c.$61.0

d.$64.1

e.$67.3

 

 

 

 

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