An asset used in a four year project falls

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 it will be worthless. The project is estimated to generate $2,040,000 in annual sales, with costs of $735,000. The tax rate is 34 percent and the required return is 15 percent.

What is the project’s NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Your firm is contemplating the purchase of a new $570,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $58,000 at the end of that time. You will save $270,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $73,000 (this is a one-time reduction). If the tax rate is 35 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

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 $6,200,000 and will be sold for $1,400,000 at the end of the project. If the tax rate is 30 percent, what is the aftertax salvage value of the asset? Refer to the MACRS schedule. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

You are evaluating two different silicon wafer milling machines. The Techron I costs $222,000, has a three-year life, and has pretax operating costs of $57,000 per year. The Techron II costs $390,000, has a five-year life, and has pretax operating costs of $30,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $34,000. If your tax rate is 35 percent and your discount rate is 9 percent, compute the EAC for both machines. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

EAC

Techron I

$

Techron II

$

Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $224,000, has a four-year life, and requires $71,000 in pretax annual operating costs. System B costs $318,000, has a six-year life, and requires $65,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 30 percent and the discount rate is 9 percent.

Calculate the NPV for both conveyor belt systems. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. A negative answer should be indicated by a minus sign.)

NPV

System A

$

System B

$

Consider the following cash flows on two mutually exclusive projects:

Year

Project A

Project B

0

–$

64,000

–$

79,000

1

44,000

43,000

2

39,000

52,000

3

34,000

55,000

The cash flows of Project A are expressed in real terms, whereas those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 11 percent and the inflation rate is 4 percent.

Calculate the NPV for each project. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

NPV

Project A

$

Project B

$

Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $205,000. The company is an ongoing operation, but it expects competitive pressures to erode its real net cash flows at 4 percent per year in perpetuity. The appropriate real discount rate for the company is 11 percent. All net cash flows are received at year-end. What is the present value of the net cash flows from the company’s operations? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value of cash flows

$

You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1.35 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $1,450,000 on an aftertax basis. In four years, the land could be sold for $1,550,000 after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $120,000. An excerpt of the marketing report is as follows:

The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 3,300, 4,200, 4,800, and 3,700 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $600 can be charged for each zither. Because zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued.

PUTZ feels that fixed costs for the project will be $400,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $3.00 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $375,000. Net working capital of $120,000 will be required immediately. PUTZ has a 38 percent tax rate, and the required return on the project is 13 percent. Assume the company has other profitable projects. MACRS schedule.

What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)