8. The Tyler and Maria Corporation is evaluating a project to setupa plant to manufacture electronic gadgets to enhanceautomobile performance. According to the CFO, thebusiness appears to be profitable with growth opportunitiesin the Northeastern corridor. The project will provide a netcash inflow of $250,000 for the firm during the first year.Cash flows are projected to grow at a rate of 2.8 percent peryear forever. The project requires an initial investment of$3,700,000.A) If the company requires a return of 9 percent on suchprojects, should the business be started?B) Provide your analysis to justify your position.

The objective of the question is to determine whether the Tyler and Maria Corporation should proceed…

Answered: 8. The Tyler and Maria Corporation is…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 9P

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Jasmine Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, and $2,000 for years 6 through 10. What is the payback period for this project?
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
You have been asked to assess whether it makes sense for CASTEC INC. to invest in a new telecom investment. The initial investment is expected to be $60 million and the project is expected to generate income for the next 10 years, with the income statement below providing a measure of revenues and expenses for the project. The project is expected to increase working capital investment by an amount equal to 12% of annual revenues. The working capital investment is expected to be recovered at the end of the project. Revenues $28,000,000 Cost of Goods Sold $12,000,000 Operating Expenses $6,000,000 Depreciation $5,000,000 EBIT $5,000,000 -Interest Expenses $2,000,000 EBT $3,000,000 Taxes @ 30% $900,000 Net Income $2,100,000 If the cost of capital for CASTEC INC. is 12% should the company invest in this project? Use IRR. Show all your work and justify your recommendation to receive any credit.
You have been asked to assess whether it makes sense for CASTEC INC. to invest in a new telecom investment. The initial investment is expected to be $60 million and the project is expected to generate income for the next 10 years, with the income statement below providing a measure of revenues and expenses for the project. The project is expected to increase working capital investment by an amount equal to 12% of annual revenues. The working capital investment is expected to be recovered at the end of the project. Revenues $28,000,000 Cost of Goods Sold $12,000,000 Operating Expenses $6,000,000 Depreciation $5,000,000 EBIT $5,000,000 -Interest Expenses $2,000,000 EBT $3,000,000 Taxes @ 30% $900,000 Net Income $2,100,000 If the cost of capital for CASTEC INC. is 12% should the company invest in this project? Show all your work and justify your recommendation to receive any credit.
Fijisawa Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. The initial outlay would be $2,950,000, and the project would generate incremental free cash flows of $750,000 per year for 6 years. The appropriate required rate of return is 9 percent. A; Calculate the NPV. B; Calculate the PI. C; Calculate the IRR. D; Should this project be accepted?
A firm is considering a new project that requires an investment of $750,000. The firm plans to raise $250,000 through crowd funding and finance the remaining $500,000 through a private equity investment with a required rate of return of 15%. The project is expected to generate cash flows of $150,000 per year for the next 8 years. Required: What is the internal rate of return (IRR) of the project? Should the firm take this project?
GeoSourcex is considering opening a new titanium mine. Once in operation, the mine is expected to produce positive net cash flows in perpetuity starting 3 years from now at $19.5 million per year but declining at a constant rate of 1.8% per year. The costs of getting the mine operational include an immediate payment of $110.0 million to purchase the land and acquire the mineral rights, plus other start -up costs of $10.0 million per year for three years starting in one year. If the project's cost of capital is 10.2% per year (compounded annually) what is the Net Present Value of this new mine?
Sunland Corporation is considering investing in a new facility. The estimated cost of the facility is $2,336,000. It will be used for 12 years, then sold for $740,000. The facility will generate annual cash inflows of $398,000 and will need new annual cash outflows of $127,000. The company has a required rate of return of 7%. Calculate the internal rate of return on this project, and discuss whether the project should be accepted. (Round answer to O decimal places, e.g. 13%) Internal rate of return The project should be %
Retsa Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $800,000 and will yield the following expected cash flows. Management requires investments to have a payback period of two years, and it requires a 10% return on its investments.
Aurum, Inc. is considering the purchase of new mining equipment. The equipment will cost $1,500,000 and will produce an incremental cash flow of $400,000 per year over its five-year life. The disposal value is expected to be $20,000. The company has a required rate of return of 10%. What is the NPV of the project?
A company is developing a special vehicle for Arctic exploration. The development requires an initial investment of $80,000 and investments of $50,000 and $42,000 for the next two years, respectively. Net returns beginning in Year 4 are expected to be $44,000 per year for 10 years. If the company requires a rate of return of 14%, compute the net present value of the project and determine whether the company should undertake the project. The net present value of the project is S (Round the final answer to the nearest dollar as needed. Round all intermediate values to six decimal places as needed.)
Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million. Kim expects that the hotel will produce positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%. While Kim expects the cash flows to be $3 million a year, it recognizes that the cash flows could, in fact, be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Kim is deciding whether to proceed with the hotel today or to wait 1 year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain…

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