Yeatman Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs:Year 1Year 2Year 3Unit sales3,5004,0004,200Sales price$38.50$39.88$40.15Variable cost per unit$22.34$22.85 $23.67Fixed operating costs $37,000 $37,500 $38,120This project will require an investment of $15,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation att = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project's four-year life.Yeatman pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project's net presentvalue (NPV) would be under the new tax law.Which of the following most closely approximates what the project's net present value (NPV) would be under the new tax law?(Hint: Round your finalanswer to two decimal places and choose the value that most closely matches your answer.)O $63,521.64O $49,712.59Year 44,250$41.55$23.87$39,560O $66,283.45O $55,236.21Which of the of the following most closely approximates what the project's NPV would be when using straight-line depreciation? (Hint: Round yourfinal answer to two decimal places and choose the value that most closely matches your answer.)

The steps involved in the computation of the net present value of a project are:1. Calculate the…

Answered: Yeatman Co. is considering an…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Hungry Whale Electronics is considering an investment that will have the following sales, variable costs, and fixed operating costs: Sales (units) Sales price Variable cost per unit Fixed costs, excluding depreciation Accelerated depreciation rate Year 1 Year 2 4,200 4,100 $29.82 $30.00 $12.15 $13.45 $41,000 33% Year 3 4,300 $30.31 $14.02 $41,670 $41,890 45% 15% This project will require an investment of $10,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Hungry Whale Electronics pays a constant tax rate of 40%, and it has a required rate of return of 11%. When using accelerated depreciation, the project's net present value (NPV) is Using the When using straight-line depreciation, the project's NPV is Year 4 4,400 $33.19 $14.55 $40,100 7% depreciation method will result in the greater NPV for the project.
Barker Production Company is considering the purchase of a flexible manufacturing system. The annual cash benefits/savDecreased waste$ 75,000Increased quality100.000Decrease in operating costs62,500Increase in on-time deliveries12.500The system will cost S750,000 and will last ten years. The company's cost of capital is 10%.What is the payback period for the flexible manufacturing system?What is the NPV for the flexible manufacturing system?
The most likely outcomes for a particular project are estimated as follows: Unit price: Variable cost: Fixed cost: Expected sales: $ 50 $ 30 $ 490,000 48,000 units per year However, you recognize that some of these estimates are subject to error. Suppose each variable turns out to be either 10% higher or 10% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $2.3 million, which will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 21%, and the required rate of return is 10%. a. NPV b. NPV a. What is project's NPV in the best-case scenario, that is, assuming all variables take on the best possible value? b. What is project's NPV in the worst-case scenario? Note: For all the requirements, a negative amount should be indicated by a minus sign. Enter your answers in dollars, not in millions. Do not round intermediate calculations. Round your answers to the nearest dollar amount. 4
The most likely outcomes for a particular project are estimated as follows: Unit price: Variable cost: Fixed cost: Expected sales: 50 24 30 $370,000 36,000 units per year However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 10% higher or 10% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $1.4 million, which will be depreclated straight-line over the project life to a final value of zero. The firm's tax rate is 21% and the required rate of return is 14%. (For all the requirements, a negative amount should be indicated by a minus sign. Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.) a. What is project NPV in the best-case scenario, that is, assuming all variables take on the best possible value? b. What is project NPV in the worst-case scenario?
‏A firm is considering three mutually exclusive alternatives as part of a production improvement program . The alternatives are : Alternative A ( i = 12 % ) B ( i = 10 % ) C ( i = 15 % ) Installation Cost ( U ) 200,000 270,000 190,000 Uniform Annual 30,750 40,500 30,250 Benefit ( U ) Useful life in years 12 15 14 Which of the above should be chosen
You are evaluating a product for your company. You estimate the sales price of the product to be $200 per unit and sales volume to be 2,000 units in year 1; 5,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $75 per unit and fixed costs are $200,000 per year. The project requires an initial investment of $360,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $40,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 13 percent. What will the year 2 free cash flow for this project be? Multiple Choice $170,412 $192,500 $201,300 $520,950
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Fox Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 Unit sales 3,500 4,000 4,200 4,250 Sales price $38.50 $39.88 $40.15 $41.55 Variable cost per unit $22.34 $22.85 $23.67 $23.87 Fixed operating costs except depreciation $37,000 $37,500 $38,120 $39,560 Accelerated depreciation rate 33% 45% 15% 7% This project will require an investment of $10,000 in new Determine what the project's net present value (NPV) equipment. The equipment will have no salvage value at would be when using accelerated depreciation. the end of the project's four-year life. Fox pays a $37,170 constant tax rate of 40%, and it has a weighted average $46,463 cost of capital (WACC) of 11%. Determine what the $55,756 project's net present value (NPV) would be when using $41,817 accelerated depreciation. Now determine what the project's NPV would be when using straight-line depreciation. Using the depreciation method will result in…
A firm is considering the following two mutually exclusive alternatives as a part of a production improvement program as follows: If MARR = 10%, compare the alternatives, and select the best one. %3D A B Capital investment $25,000 $32,000 AOC $230 $200 Annual Taxes $120 $130 Annual revenues $ 4000 for the first 6 years and $5800 (from year 7 thereafter) $6500 Salvage value $2500 Useful Life 30 Infinity
We project unit sales for a new household-use laser-guided cockroach search and destroy system as follows: Year 12345 Unit Sales 101,000 113,000 136,000 142,000 95,000 The new system will be priced to sell at $475 each. The cockroach eradicator project will require $2,200,000 in net working capital to start, and total net working capital will rise to 15% of the change in sales. The variable cost per unit is $345, and total fixed costs are $2,500,000 per year. The equipment necessary to begin production will cost a total of $22 million. This equipment is mostly industrial machinery and thus qualifies for CCA at a rate of 20%. In five years, this equipment will actually be worth about 20% of its cost. The relevant tax rate is 35%, and the required return is 17%. Based on these preliminary estimates, what is the NPV of the project? (Enter the answer in dollars. Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) NPV A
We project unit sales for a new household-use laser-guided cockroach search and destroy system as follows: Year 1 2 3 4 5 The new system will be priced to sell at $465 each. The cockroach eradicator project will require $2,000,000 in net working capital to start, and total net working capital will rise to 15% of the change in sales. The variable cost per unit is $335, and total fixed costs are $2,300,000 per year. The equipment necessary to begin production will cost a total of $21 million. This equipment is mostly industrial machinery and thus qualifies for CCA at a rate of 20%. In five years, this equipment will actually be worth about 20% of its cost. NPV Unit Sales 100,000 112,000 135,000 141,000 94,000 The relevant tax rate is 35%, and the required return is 15%. Based on these preliminary estimates, what is the NPV of the project? (Enter the answer in dollars. Do not round your intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)…
An investor was offered a production line project, investment volume 00 2850 dollars, annual sales volume (1800) units, unit price (135 dollars), annual variable costs (0 0 720 dollars), annual fixed costs (0 14250). Calculate the rate of return Simple and break-even point for the project.

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