Capital Budgeting Questions 1.) Who Dat Restaurant is considering the purchase of a $10,600 soufflÃ© maker. The soufflÃ© maker has an economic life of five years and will be fully depreciated by the straight-line method. The machine will produce 2,300 soufflÃ©s per year, with each costing $2.70 to make and priced at $5.55. Assume that the discount rate is 16 percent and the tax rate is 40 percent. What is the NPV of the project? 2.) The Dante Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 35 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Year 0 Year 1 Year 2 Year 3 Year 4 Investment $ 32,000 Sales revenue $ 16,500 $ 17,000 $ 17,500 $ 14,500 Operating costs 3,500 3,600 3,700 2,900 Depreciation 8,000 8,000 8,000 8,000 Net working capital spending 380 430 480 380 ? ________________________________________ a. Compute the incremental net income of the investment for each year. b. Compute the incremental cash flows of the investment for each year c. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project? â€ƒ 3.) Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.58 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,040,000 in annual sales, with costs of $735,000. The project requires an initial investment in net working capital of $260,000, and the fixed asset will have a market value of $280,000 at the end of the project. If the tax rate is 34 percent, What is the projectâ€™s Year 0 net cash flow? Year 1? Year 2? Year 3? If the required return is 15 percent, what is the project’s NPV? 4.) Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.61 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,050,000 in annual sales, with costs of $751,000. The project requires an initial investment in net working capital of $270,000, and the fixed asset will have a market value of $275,000 at the end of the project. If the tax rate is 30 percent, what is the projectâ€™s year 1 net cash flow? Year 2? Year 3? If the required return is 15 percent, what is the project’s NPV? â€ƒ 5.) Your firm is contemplating the purchase of a new $595,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $63,000 at the end of that time. You will save $225,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $78,000 (this is a one-time reduction). If the tax rate is 35 percent, what is the IRR for this project? 6.) An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $6,140,000 and will be sold for $1,340,000 at the end of the project. If the tax rate is 30 percent, what is the aftertax salvage value of the asset? 7.) You are evaluating two different silicon wafer milling machines. The Techron I costs $216,000, has a three-year life, and has pretax operating costs of $55,000 per year. The Techron II costs $380,000, has a five-year life, and has pretax operating costs of $28,000 per year. For both milling machines, use straight-line depreciation to zero over the projectâ€™s life and assume a salvage value of $32,000. If your tax rate is 35 percent and your discount rate is 10 percent, compute the EAC for both machines. 8.) BOE Manufact
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