Business Finance
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,300,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,900,000 in annual sales, with costs of $1,910,000. The project requires an initial investment in net working capital of $186,000 and the fixed asset will have a market value of $221,000 at the end of the project. Assume that the tax rate is 21 percent and the required return on the project is 12 percent. a. What are the net cash flows of the project each year? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) b.What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
(a) Year 0 = Initial Fixed Asset Investment + Initial Investment in Net Working Capital Year 0 = - $ 2,300,000 - $ 186,000 Year 0 = -2,486,000 Year 1 = Net cash Inflow = $ 943,100 Year 2 = Net cash Inflow = $ 943,100 Year 3 : Net cash Inflow + Net Working capital Investment Recouped + After Tax Salvage value Year 3 = $ 943,100 + $ 186,000 + $ 174,590 Year 3 = 1,303,690 (b) The NPV of the project is = $ 35,827.91 Work and answers: https://gyazo.com/8c718d21061d4dcff48483ec1d611587
H. Cochran Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,310,000. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,785,000 in annual sales, with costs of $680,000. The project requires an initial investment in net working capital of $400,000, and the fixed asset will have a market value of $405,000 at the end of the project. a.If the tax rate is 25 percent, what is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to two decimal places, e.g., 32.16.) b.If the required return is 11 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to two decimal places, e.g., 32.16.)
(a) Yr 0 cash flow = -2,710,000 Yr 1 cash flow = 1,021,230.75 Yr 2 cash flow = 1,085,448.75 Yr 3 cash flow = 1,660,820.50 (b) NPV = 305,379.89 Work shown: https://gyazo.com/b5c34591bf0166e2763477c3a0bd4d97 Answers shown: Part (a) https://gyazo.com/9c5142feb53c0b62bb25baefb83df7f1 Part (b) https://gyazo.com/8c6dfab7f6e44f15868b8c29a70a5265
Consider an asset that costs $705,000 and is depreciated straight-line to zero over its 9-year tax life. The asset is to be used in a 6-year project; at the end of the project, the asset can be sold for $189,000. If the relevant tax rate is 24 percent, what is the aftertax cash flow from the sale of this asset? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Accum deprec = (cost - salvage value) / life in years * number of years expired Accum deprec = ($705,000 - 0) / 9 years x 6 years Accum deprec = 470,000 book value of asset = purchase price - accumulated depreciation book value of asset = 705,000 -470,000 book value of asset = 235,000 tax savings on loss of sale = 46,000 x 24% tax savings on loss of sale = 11,040 after tax cash flow from sale of asset = sale value + tax savings after tax cash flow from sale of asset = 189,000+11,040 = 200,040
We are evaluating a project that costs $1,800,000, has a 6-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 87,300 units per year. Price per unit is $38.19, variable cost per unit is $23.40, and fixed costs are $827,000 per year. The tax rate is 24 percent and we require a return of 9 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Best-case NPV = 2,844,041.29 Worst-case NPV = -2,266,478.88 Work shown and answers https://gyazo.com/5fb41d50ff3add6a29bff8f46920be50
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,550,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,710,000 in annual sales, with costs of $1,730,000. If the tax rate is 23 percent, what is the OCF for this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Depreciation = 2,550,000/3 Depreciation = 850,000 EBT = 2710000 - (1730000 + 850,000) EBT = 130,000 Taxes@23% = 29900 Net income = 130,000 - 29900 Net income = 100,100 OCF = 100,100 + 850,000 OCF = 950,100
Your firm is contemplating the purchase of a new $515,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 6-year life. It will be worth $72,000 at the end of that time. You will save $181,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $49,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. If the tax rate is 24 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
IRR = 25.21% Work shown and answer: https://gyazo.com/fc45d59bf94cc87081d334ddaa5971f3
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,430,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,770,000 in annual sales, with costs of $1,790,000. Assume the tax rate is 24 percent and the required return on the project is 10 percent. What is the project's NPV? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Initial Investment = $2,430,000 Useful Life = 3 years Annual Depreciation = Initial Investment / Useful Life Annual Depreciation = $2,430,000 / 3 Annual Depreciation = $810,000 Annual Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation Annual Operating Cash Flow = ($2,770,000 - $1,790,000) * (1 - 0.24) + 0.24 * $810,000 Annual Operating Cash Flow = $980,000 * 0.76 + 0.24 * $810,000 Annual Operating Cash Flow = $939,200 Required return = 10% NPV = -$2,430,000 + $939,200/1.10 + $939,200/1.10^2 + $939,200/1.10^3 NPV = -$94,348.61
Kolby's Korndogs is looking at a new sausage system with an installed cost of $730,000. This cost will be depreciated straight-line to zero over the project's 7-year life, at the end of which the sausage system can be scrapped for $100,000. The sausage system will save the firm $213,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $65,000. If the tax rate is 25 percent and the discount rate is 11 percent, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
NPV = 148,059.22 Work and answer shown below: https://gyazo.com/9133959d7ba124d7e8b2c2feda30e23d
A proposed new investment has projected sales of $680,000. Variable costs are 43 percent of sales, and fixed costs are $195,000; depreciation is $92,000. Assume a tax rate of 24 percent. What is the projected net income? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Sales = 680000 (-) Variable costs @ 43% = (292400) Contribution margin = 387600 (-) Fixed costs including depreciation ( 195000 + 92000 ) = (287000) Income before taxes = 100,600 (-) Taxes @ 24% = (24144) Net income = 76,456
Winnebagel Corp. currently sells 29,800 motor homes per year at $82,000 each and 8,800 luxury motor coaches per year at $124,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 24,800 of these campers per year at $28,000 each. An independent consultant has determined that if the company introduces the new campers, it should boost the sales of its existing motor homes by 4,400 units per year and reduce the sales of its motor coaches by 1,030 units per year. What is the amount to use as the annual sales figure when evaluating this project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Sales due solely to the new product line are: Sales = 24,800($28,000) Sales = $694,400,000 Increased sales of the motor home line occur because of the new product line introduction; thus: 4,400($82,000) = $360,800,000 in new sales is relevant. Erosion of luxury motor coach sales is also due to the new mid-size campers;thus: Loss in sales = 1,030($124,000) Loss in sales = $127,720,000 Net sales = $694,400,000 + $360,800,000 - $127,720,000 Net sales = $927,480,000
