FIN: Chapter 10

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.46 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,000,000 in annual sales, with costs of $695,000. The project requires an initial investment in net working capital of $220,000, and the fixed asset will have a market value of $300,000 at the end of the project. If the tax rate is 35 percent, what is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? If the required return is 16 percent, what is the project's NPV?

(2460000-0)/3= 820000 2000000-695000-820000= 485,000 485000x.35= 169750 485000-169750=315250 OCF= 315250+820000= 1135250 OCF+Change in NWC+Cap Spend= CF Year 0: Initial FA+NWC -2460000+-220000= -2680000 Year 1: OCF 1135250 Year 2: 1135250 Year 3: OCF + what you receive but need to consider taxes and add back NWC 1135250+ (300000-(300000x.35))+220000 Use Fin Calc for CF 2

An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $6,010,000 and will be sold for $1,210,000 at the end of the project. If the tax rate is 30 percent, what is the aftertax salvage value of the asset? Refer to Table 10.7.

1,158,558.40 Calc Depr. using % of 20, 32, 19.4, 11.52 and add 6010000-All Depr= 1038528 1210000-1038528= 171472x.30=51441.60 1210000-51441.6

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.73 million. 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 $2,090,000 in annual sales, with costs of $785,000. If the tax rate is 30 percent, what is the OCF for this project?

1186500 Depr: (2730000-0)/3=910000 2090000-785000-910000= 395000 395000x.3=118500 395000-118500=276500 OCF= NI + Depr 276500+910000

Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $4.7 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would net $5 million. The company wants to build its new manufacturing plant on this land; the plant will cost $12.2 million to build, and the site requires $740,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project?

17,940,000 5,000,000+12,200,000+740,000 Original cost of land is sunk cost, don't include 5 million is opportunity cost, included

Consider an asset that costs $616,000 and is depreciated straight-line to zero over its seven-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $183,000. If the relevant tax rate is 34 percent, what is the aftertax cash flow from the sale of this asset?

180620 Calc Depr. 616000/7= 88000 per year 88000x5yr project life 440000 Calc Net BV 616000-440000=176000 Calc Gain on Sale 183000-176000=7000 7000x.34= 2380 Calc After tax 183000-2380=180620

Winnebagel Corp. currently sells 29,000 motor homes per year at $67,000 each, and 11,500 luxury motor coaches per year at $104,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 24,000 of these campers per year at $13,500 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 2,300 units per year, and reduce the sales of its motor coaches by 1,000 units per year. What is the amount to use as the annual sales figure when evaluating this project?

374,100,000 24000x13500=324000000 2300x67000= 154100000 -1000x104000= -104000000 (erosion) 324000000+154100000-104000000 The current sales don't matter because they aren't relevant to the project

You are evaluating two different silicon wafer milling machines. The Techron I costs $255,000, has a three-year life, and has pretax operating costs of $68,000 per year. The Techron II costs $445,000, has a five-year life, and has pretax operating costs of $41,000 per year. For both milling machines, use straight-line depreciation to zero over the project's life and assume a salvage value of $45,000. If your tax rate is 34 percent and your discount rate is 8 percent, compute the EAC for both machines.

Compute PV for each -255000+ (-68000/1.08)+(-68000/1.08^2)+ (-68000/1.08^3)= EAC is PMT for NPV as PV

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.67 million. 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 $2,070,000 in annual sales, with costs of $765,000. The tax rate is 34 percent and the required return on the project is 13 percent. What is the project's NPV?

Depr: (2670000-0)/3 = 890000 2070000-765000-890000= 415000 415000x.34= 141100 415000-141100= 273900 OCF= 273900+890000= 1163900 Use Fin Calc: N=3 I/Y=13 FV=0 PMT=OCF 1163900 PV= 2748145.51 NPV= PV-Cost 2748145.51-2670000= 78,145.51

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $3 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,180,000 in annual sales, with costs of $855,000. The project requires an initial investment in net working capital of $400,000, and the fixed asset will have a market value of $260,000 at the end of the project. If the tax rate is 30 percent, what is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? If the required return is 9 percent, what is the project's NPV?

Depr: Use % of 33.33, 44.45, and 14.81 2180000-855000-2777700= -1452700

Fill in the missing numbers for the following income statement. Sales $ 676,900 Costs 431,800 Depreciation 104,400 EBIT $ Taxes (35%) Net income $ Calculate the OCF. What is the depreciation tax shield?

EBIT: 140700 Taxes: 49245 Net Income: 91455 OCF: EBIT+Depr-taxes= 195855 Depr. Tax Shield: Depr x Tax rate 104400x.35=36540

A proposed new investment has projected sales of $820,000. Variable costs are 60 percent of sales, and fixed costs are $171,000; depreciation is $72,000. Prepare a pro forma income statement assuming a tax rate of 30 percent. What is the projected net income?

Sales 820,000 Variable Costs (.6x820000) 492000 Fixed Costs 171000 Depreciation 72000 EBT (subtract all numbers) 85000 Taxes (.3 x 85000) 25500 Net Income (85000-25500) 59500

A piece of newly purchased industrial equipment costs $979,000 and is classified as seven-year property under MACRS. The MACRS depreciation schedule is shown in Table 10.7. Calculate the annual depreciation allowances and end-of-the-year book values for this equipment. Year Bgn BV Depr End BV 1 $ $ $ 2 $ $ $ 3 $ $ $ 4 $ $ $ 5 $ $ $ 6 $ $ $ 7 $ $ $ 8 $ $ $

Use MACRS % for 7 year: 14.29, 24.49, 17.49 Etc. Multiply 979000 x 14.29%= Depr 979000-Depr=End Val Use the End Val as the next Begn Value and then use the next percentage to find depr with the initial amount of 979,000 Depreciates down to 0