Concept explainers
Project Analysis and Inflation The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the
Revenues | $325.000 |
Labor costs | 197,000 |
Other costs | 64,000 |
The company will lease machinery for $150,000 per year. The lease payments start at the end of Year 1 and are expressed in nominal terms. Revenues will increase by 4 percent per year in real terms. Labor costs will increase by 3 percent per year in real terms. Other costs will increase by 1 percent per year in real terms. The rate of inflation is expected to be 6 percent per year. The required rate of return for this project is 10 percent in real terms. The company has a tax rate of 34 percent. All cash flows occur at year-end. What is the NPV of the proposed toad ranch today?
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Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
- 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?arrow_forwardEach of the following scenarios is independent. All cash flows are after-tax cash flows. Required: 1. Patz Corporation is considering the purchase of a computer-aided manufacturing system. The cash benefits will be 800,000 per year. The system costs 4,000,000 and will last eight years. Compute the NPV assuming a discount rate of 10 percent. Should the company buy the new system? 2. Sterling Wetzel has just invested 270,000 in a restaurant specializing in German food. He expects to receive 43,470 per year for the next eight years. His cost of capital is 5.5 percent. Compute the internal rate of return. Did Sterling make a good decision?arrow_forwardThe production department is proposing the purchase of an automatic insertion machine. It has identified 3 machines, each with an estimated life of 10 years. Which machine offers the best internal rate of return? Annual net cash flows Average investment Machine A only Machine B only Machine C only O Machines A and B Machine A $ 50,000 250,000 Machine B $ 40,000 300,000 Machine $ 75,000 500,000arrow_forward
- Tumer Hardware is adding a new product line that will require an investment of $1,480,000 Managers estimate that this investment will have a 10-year Me and generate net cash inflows of $330.000 the first year $270,000 the second year, and $230.000 each year thereafter for eight years. The investment has no residual value Compute the payback period Cm First enter the formula, then calculate the payback period (Round your answer to two decimal places) Full years *( Amount to complete recovery in next year Projected cash inflow in next year ) Payback yearsarrow_forwardA manufacturer of automated optical inspection devices is deciding on a project to increase the productivity of the manufacturing processes. The estimated costs for the two feasible alternatives being compared are shown below. Use the internal rate of return (IRR) method to determine which alternative should be selected if the analysis period is 8 years and the company's MARR is 4% per year. Alternative M N Initial costs $30,000 $45,000 Net annual cash flow $4,500 $7,000 Life in years 8 8 (a) IRR of base alternative = (b) IRR of incremental cash flow = (c) Choose Alternativearrow_forwardThere are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $34,000 and is expected to generate the following cash flows: First Year Second Year Third Year Total Alpha Project $32,000 $22,000 $5,000 $59,000 Beta Project 8,000 23,500 28,000 59,500 Present value and future values table: https://openstax.org/books/principles-managerial-accounting/pages/time-value-of-money A. If the discount rate is 12%, compute the NPV of each project. Round your present value factor to three decimal places and final answer to answer to 2 decimal places. Alpha Project $_________ Beta Project $________ B. Which project should be recommended. _____________arrow_forward
- Payback Period Payson Manufacturing is considering an investment in a new automated manufacturing system. The new system requires an investment of $1,200,000 and either has: a. Even cash flows of $400,000 per year or b. The following expected annual cash flows: $150,000, $150,000, $400,000, $400,000, and $100,000. Required: Calculate the payback period for each case. Round your answer to one decimal place. a. years b. yearsarrow_forwardCapital Budgeting Case You are a senior financial analyst at PALTEL and you are requested to analyse the following project, where all of the dollar figures are in thousands of dollars. In year 0, the project requires an $11,350 investment in plant and equipment which is depreciated using the straight-line method over seven years and has a salvage value of $1,400 in year 7. The project is forecast to generate sales of 2,000 units in year 1, rising to 7,400 units in year 5, declining to 1,800 units in year 7. The inflation rate is forecast to be 2.0% in year 1, rising to 4.0% in year 5, and then levelling off. The real cost of capital is forecasted to be 11.0% in year 1, rising to 12.2% in year 7. The tax rate is constant at 35%. Sales revenue per unit is forecasted to be $9.70 in year 1 and then grow with inflation. The variable unit cost for Direct Labour, Materials, Selling Expenses, and overhead are forecasted to be $3.50, $2.00, $1.20, and $0.70, respectively, in year 1 and then…arrow_forwardBlossom Industries management is planning to replace some existing machinery in its plant. The cost of the new equipment and the resulting cash flows are shown in the accompanying table. The firm uses an 18 percent discount rate for projects like this. Should management go ahead with the project? Year Cash Flow 0 -$2,970,000 1 787,610 2 869,600 3 1,030,500 4 1,125,360 5 1,354,000 What is the NPV of this project? (Enter negative amounts using negative sign e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to 0 decimal places, e.g. 1,525.) The NPV is $enter The NPV in dollars rounded to 0 decimal places Should management go ahead with the project? The firm should select an option rejectaccept the project.arrow_forward
- A manufacturing company is considerign the purchase of new machinery to increase its production capacity. The company has identified a new machine that costs $500,000 and is expected to increase production by 20%. The company expects to sell the additional products for $600,000, resulting in a net profit of $100,000. The company can finance the purchase through a bank loan with an interest rate of 5% over a five year term. What is the expected return on investment (ROI) for the purchase of the new machinery 5% 10% 20% 25%arrow_forwardCapital budgeting PARCO is considering a new project that complements its existing business. The machine required for the project costs $3.9 million. The marketing department predicts that sales related to the project will be $2.35 million per year for the next four years, after which the market will cease to 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 25 percent of sales. PARCO also needs to add net working capital of $150,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 30 percent. The required rate of return for PARCO is 13 percent. Should PARCO proceed with the project?arrow_forwardDowling Sportwear is considering building a new factory to produce baseball bats. The project will require an initial outlay of $ 8,000,000 and will generate annual net cash inflows of $ 2,000,000 per year for 6 years. Calculate the project's Net Present Value (NPV) assuming a 9% discount rate: a. $871,837 b. $971,837 c. $6,000,000 d. $4,000,000arrow_forward
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