Parker and stone inc is looking

Problem 10-1 Relevant Cash Flows [LO1]

Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $6.0 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would net $6.3 million. The company wants to build its new manufacturing plant on this land; the plant will cost $13.5 million to build, and the site requires $870,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

Cash flow amount

$

Fill in the missing numbers for the following income statement. (Input all amounts as positive values.)

Sales

$

672,900

Costs

427,800

Depreciation

100,400

EBIT

$

Taxes (30%)

Net income

$

Calculate the OCF.

OCF

$

What is the depreciation tax shield?

Depreciation tax shield

$

A piece of newly purchased industrial equipment costs $983,000 and is classified as seven-year property under MACRS. The MACRS depreciation schedule is shown in Table 10.7 . Calculate the annual depreciation allowances and end-of-the-year book values for this equipment. (Leave no cells blank - be certain to enter "0" wherever required. Round your answers to 2 decimal places. (e.g., 32.16))

Year

Beginning Book Value

Depreciation

Ending book Value

1

$

$

$

2

$

$

$

3

$

$

$

4

$

$

$

5

$

$

$

6

$

$

$

7

$

$

$

8

$

$

$

A proposed new investment has projected sales of $790,000. Variable costs are 60 percent of sales, and fixed costs are $168,000; depreciation is $69,000. Prepare a pro forma income statement assuming a tax rate of 30 percent. What is the projected net income? (Input all amounts as positive values.)

Sales

$

Variable costs

Fixed costs

Depreciation

EBT

$

Taxes

Net income

$

Consider an asset that costs $639,000 and is depreciated straight-line to zero over its nine-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $166,000. If the relevant tax rate is 30 percent, what is the aftertax cash flow from the sale of this asset?

Aftertax salvage value

$

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.46 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 $2,000,000 in annual sales, with costs of $695,000. If the tax rate is 35 percent, what is the OCF for this project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

OCF

$

Dog Up! Franks is looking at a new sausage system with an installed cost of $490,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $72,000. The sausage system will save the firm $170,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $31,000. If the tax rate is 30 percent and the discount rate is 8 percent, what is the NPV of this project? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

NPV

$

Your firm is contemplating the purchase of a new $630,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $70,000 at the end of that time. You will save $260,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $85,000 (this is a one-time reduction). If the tax rate is 30 percent, what is the IRR for this project? (Round your answer to 2 decimal places. (e.g., 32.16))

IRR

%

A five-year project has an initial fixed asset investment of $355,000, an initial NWC investment of $39,000, and an annual OCF of −$38,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required return is 11 percent, what is this project’s equivalent annual cost, or EAC? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Equivalent annual cost

$

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