Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 6, Problem 30QP
Calculating a Bid Price Another utilization of cash flow analysis is selling the bid price on a project. To calculate the bid price, we set the project
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The technique for calculating a bid price can be extended to many other types of
problems. Answer the following questions using the same technique as setting a bid
price; that is, set the project NPV to zero and solve for the variable in question. Martin
Enterprises needs someone to supply it with 154,000 cartons of machine screws per
year to support its manufacturing needs over the next five years, and you've decided to
bid on the contract. It will cost $1,940,000 to install the equipment necessary to start
production; you'll depreciate this cost straight-line to zero over the project's life. You
estimate that, in five years, this equipment can be salvaged for $164,000. Your fixed
production costs will be $279,000 per year, and your variable production costs should
be $10.80 per carton. You also need an initial investment in net working capital of
$144,000. The tax rate is 24 percent and you require a return of 13 percent on your
investment. Assume that the price per carton is $17.40.…
Tyler, Inc., is considering switching to a new production technology. The cost of the required equipment will be $3,529,783 . The discount rate is 13.99 percent. The cash flows that the firm expects the new technology to generate are as follows.
a. Compute the payback and discounted payback periods for the project.
b. What is the NPV for the project? Should the firm go ahead with the project?
c. What is the IRR, and what would be the decision based on the IRR?
Years
CF
0
$(3,529,783)
1-2
0
3-5
$916,204
6-9
$1,590,056
The technique for calculating a bid price can be extended to many other types of
problems. Answer the following questions using the same technique as setting a bid
price; that is, set the project NPV to zero and solve for the variable in question. Martin
Enterprises needs someone to supply it with 159,000 cartons of machine screws per
year to support its manufacturing needs over the next five years, and you've decided to
bid on the contract. It will cost $1,990,000 to install the equipment necessary to start
production; you'll depreciate this cost straight-line to zero over the project's life. You
estimate that, in five years, this equipment can be salvaged for $169,000. Your fixed
production costs will be $284,000 per year, and your variable production costs should
be $11.30 per carton. You also need an initial investment in net working capital of
$149,000. The tax rate is 24 percent and you require a return of 13 percent on your
investment. Assume that the price per carton is $17.90.…
Chapter 6 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 6 - Opportunity Cost In the context of capital...Ch. 6 - Prob. 2CQCh. 6 - Incremental Cash Flows Your company currently...Ch. 6 - Depreciation Given the choice, would a firm prefer...Ch. 6 - Prob. 5CQCh. 6 - Prob. 6CQCh. 6 - Equivalent Annual Cost When is EAC analysis...Ch. 6 - Prob. 8CQCh. 6 - Capital Budgeting Considerations A major college...Ch. 6 - To answer the next three questions, refer to the...
Ch. 6 - Prob. 11CQCh. 6 - To answer the next three questions, refer to the...Ch. 6 - Calculating Project NPV Flatte Restaurant is...Ch. 6 - Calculating Project NPV The Best Manufacturing...Ch. 6 - Calculating Project NPV Down Under Boomerang,...Ch. 6 - Calculating Project Cash Flow from Assets In the...Ch. 6 - Prob. 5QPCh. 6 - Project Evaluation Your firm is contemplating the...Ch. 6 - Project Evaluation Dog Up! Franks is looking at a...Ch. 6 - Prob. 8QPCh. 6 - Calculating NPV Howell Petroleum is considering a...Ch. 6 - Calculating EAC You are evaluating two different...Ch. 6 - Cost-Cutting Proposals Massey Machine Shop is...Ch. 6 - Prob. 12QPCh. 6 - Prob. 13QPCh. 6 - Comparing Mutually Exclusive Projects Vandalay...Ch. 6 - Capital Budgeting with Inflation Consider the...Ch. 6 - Prob. 16QPCh. 6 - Prob. 17QPCh. 6 - Cash flow Valuation Phillips Industries runs a...Ch. 6 - Equivalent Annual Cost Bridgton Golf Academy is...Ch. 6 - Prob. 20QPCh. 6 - Prob. 21QPCh. 6 - Prob. 22QPCh. 6 - Calculating Project NPV With the growing...Ch. 6 - Calculating Project NPV You have been hired as a...Ch. 6 - Calculating Project NPV Pilot Plus Pens is...Ch. 6 - EAC and Inflation Office Automation, Inc., must...Ch. 6 - Project Analysis and Inflation Dickinson Brothers,...Ch. 6 - Project Evaluation Aday Acoustics, Inc., projects...Ch. 6 - Calculating Required Savings A proposed...Ch. 6 - Calculating a Bid Price Another utilization of...Ch. 6 - Prob. 31QPCh. 6 - Prob. 32QPCh. 6 - Replacement Decisions Suppose we are thinking...Ch. 6 - Prob. 34QPCh. 6 - Project Analysis and Inflation The Biological...Ch. 6 - Prob. 36QPCh. 6 - Prob. 37QPCh. 6 - Prob. 38QPCh. 6 - Prob. 1MC1Ch. 6 - GOODWEEK TIRES, INC. After extensive research and...
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- The technique for calculating a bid price can be extended to many other types of problems. Answer the following questions using the same technique as setting a bid price; that is, set the project NPV to zero and solve for the variable in question. Martin Enterprises needs someone to supply it with 142,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It will cost $1,820,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. You estimate that, in five years, this equipment can be salvaged for $152,000. Your fixed production costs will be $267,000 per year, and your variable production costs should be $9.60 per carton. You also need an initial investment in net working capital of $132,000. The tax rate is 22 percent and you require a return of 12 percent on your investment. Assume that the price per carton is $16.20.…arrow_forwardYou are considering a proposal to produce and market a new sluffing machine. The most likely outcomes for the project are as follows: Expected sales: 30,000 units per year Unit price: $50 Variable cost: $30 Fixed cost: $300,000 The project will last for 10 years and requires an initial investment of $1 million, which will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 30%, and the required rate of return is 12%. However, you recognize that some of these estimates are subject to error. In one scenario a sharp rise in the dollar could cause sales to fall 30% below expectations for the life of the project and, if that happens, the unit price would probably be only $40. The good news is that fixed costs could be as low as $200,000, and variable costs would decline in proportion to sales. a. What is project NPV if all variables are as expected? Note: Do not round intermediate calculations. Enter your answer in thousands not in millions…arrow_forwardTwo new software projects are proposed to a young, start-up company. The Delta project will cost $150,000 to develop and is expected to have annual net cash flow of $40,000. The Echo project will cost $200,000 to develop and is expected to have annual net cash flow of $50,000. The company is very concerned about their cash flow. Using the payback period, which project is better from a cash flow standpoint? Why? Present the payback period for each project. Use this formula: Payback period = Investment/Annual Savingsarrow_forward
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