The best manufacturing company is considering a new investment

Week 3 Problems

Problem 6-2 Calculating Project NPV

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The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 40 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

$

26,000

  Sales revenue

$

13,500

$

14,000

$

14,500

$

11,500

  Operating costs

2,900

3,000

3,100

2,300

  Depreciation

6,500

6,500

6,500

6,500

  Net working capital spending

320

370

420

320

?

a.

Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.)

Year 1

Year 2

Year 3

Year 4

  Net income

 $ [removed]

$ [removed]

$ [removed]

$ [removed]

b.

Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations.Negative amounts should be indicated by a minus sign.)

Year 0

Year 1

Year 2

Year 3

Year 4

  Cash flow

$ [removed]

$ [removed]

$ [removed]

$ [removed]

$ [removed]

c.

Suppose the appropriate discount rate is 11 percent. What is the NPV of the project? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  NPV

Problem 6-7 Project Evaluation

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Dog Up! Franks is looking at a new sausage system with an installed cost of $495,000. 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 $73,000. The sausage system will save the firm $175,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $32,000. If the tax rate is 34 percent and the discount rate is 10 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

$ [removed]

Problem 6-8 Calculating Salvage Value

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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 $6,190,000 and will be sold for $1,390,000 at the end of the project. If the tax rate is 35 percent, what is the aftertax salvage value of the asset? Refer to MACRS schedule(Do not round intermediate calculationsand round your answer to 2 decimal places. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

  Aftertax salvage value

$ [removed]

Problem 6-9 Calculating NPV

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Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.88 million. The marketing department predicts that sales related to the project will be $2.58 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down to zero over its four-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 20 percent of sales. Howell also needs to add net working capital of $230,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 34 percent. The required rate of return for Howell is 15 percent.

What is the value of the NPV for this project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Problem 6-11 Cost-Cutting Proposals

Massey Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $540,000 is estimated to result in $225,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $91,000. The press also requires an initial investment in spare parts inventory of $27,000, along with an additional $3,200 in inventory for each succeeding year of the project. The shop’s tax rate is 30 percent and its discount rate is 8 percent. Refer to MACRS schedule.

Calculate the NPV of this project. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  NPV

$ [removed]