Question

MHI Corp. is considering a capital budgeting project developing a new and improved home management system that will allow customers to easily inventory frequently purchased items for their home and to receive reminders when these items need to be repurchased. The firm’s WACC is 6.7%. The project is slightly more risky that the average project of the firm. You have been advised to add a 3.1% premium to the firm’s WACC for the discount rate for this project. The project requires an investment of $4 million for new manufacturing equipment. This equipment will be depreciated using 5-year MACRS depreciation. The project will last three (3) years. At the end of three (3) years, the firm believes they will be able to sell this equipment for $1,000,000. The firm expects to sell 2,500 units each year as a selling price of $1,000 per unit. The cost of goods sold is expected to be 35% of revenues. Salaries and marketing expenses related to this project are expected to be $500,000 each year of the project. The project requires an initial investment in net working capital of $300,000. All working capital will be returned to the firm at the end of the project. The marginal tax rate for the firm is 34%. What is the NPV of this project? Enter all of your answers as whole numbers, without a dollar sign or commas. Use a negative sign to indicate a cash outflow.

Answer #1

(Ignore income taxes in this problem.) Nevus Tattoo Parlor is
considering a capital budgeting project. This project will
initially require a $27,000 investment in equipment and a $3,000
working capital investment. The useful life of this project is 7
years with an expected salvage value of zero on the equipment. The
working capital will be released at the end of the 7 years. The new
system is expected to generate net cash inflows of $9,000 per year
in each of...

A firm is considering investing in a 15-year capital budgeting
project with a net investment of $14 million. The project is
expected to generate annual net cash flows each year of $2 million
and a terminal value at the end of the project of $10 million. The
firm’s cost of capital is 9 percent and marginal tax rate is 40%.
What is the profitability index of this investment?
0.35
0.78
2.86
1.54
1.35

7. (CMA) Garfield Inc. is considering a 10-year capital
investment project with forecasted cash revenues of $40,000 per
year and forecasted cash operating costs of $29,000 per year. The
initial cost of the equipment for the project is $23,000, and
Garfield expects to sell the equipment for $9,000 at the end of the
tenth year. The equipment will be depreciated on a straight-line
basis over seven years for tax purposes. The project requires a
working capital investment of $7,000 at...

Quad Enterprises is considering a new three-year expansion
project that requires an initial fixed asset investment of $2.57
million. The fixed asset will be depreciated straight-line to zero
over its three-year tax life and is estimated to have a market
value of $278995 at the end of the project. The project is
estimated to generate $2280865 in annual sales, with costs of
$895746. The project requires an initial investment in net working
capital of $369370. If the tax rate is...

You are evaluating a capital budgeting replacement project with
a net investment of $85,000, which includes both an after-tax
salvage from the old asset of $5,000 and an additional working
capital investment of $10,000. The expected annual incremental cash
flows after-tax is $14,000. The project has a life of 9 years with
an expected terminal value at the end of the project of $13,000.
The cost of capital of the firm is 10 percent and the firm’s
marginal tax rate...

There are four (4) consecutive problems that use the information
below. The Lee & Pearson Company is considering an expansion of
its production facilities which will permit the firm to build and
sell a new line of cell phones. The project requires a $10,000,000
capital investment and is expected to have a three-year economic
life. Other relevant information is: At the end of the project, the
equipment can be sold for $300,000. The firm’s WACC is estimated at
8%. Incremental...

Blue Ribbon, Inc., is considering a new two-year expansion
project that requires an initial fixed asset investment of $3
million. The fixed asset actually falls into the three-year MARCRS
class (as shown in the Table below). Suppose that at the end of the
project, the fixed asset will have a market value of $2 million.
The project is estimated to generate $4 million in annual sales,
with costs of $2 million. The project also requires an initial
investment in net...

A
company is considering a project which will require the purchase of
$805,000 in new equipment. The company expects to sell the
equipment at the end of the project for 25% of its original cost,
but some assets will remain in the CCA class. Annual sales from
this project are estimated at $292,000. Initial net working capital
equal to 36.50% of sales will be required. All of the net working
capital will be recovered at the end of the project....

A
company is considering a project which will require the purchase of
$705,000 in new equipment. The company expects to sell the
equipment at the end of the project for 25% of its original cost,
but some assets will remain in the CCA class. Annual sales from
this project are estimated at $252,000. Initial net working capital
equal to 31.50% of sales will be required. All of the net working
capital will be recovered at the end of the project....

Your company is considering a project which will require the
purchase of $685,000 in new equipment. The company expects to sell
the equipment at the end of the project for 25% of its original
cost, but some assets will remain in the CCA class. Annual sales
from this project are estimated at $244,000. Initial net working
capital equal to 30.50% of sales will be required. All of the net
working capital will be recovered at the end of the project....

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