Question

Consider the following project for Hand Clapper, Inc. The company is considering a 4-year project to manufacture clap-command garage door openers. This project requires an initial investment of $16.2 million that will be depreciated straight-line to zero over the project’s life. An initial investment in net working capital of $1,020,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $13.3 million in revenues with $5.3 million in operating costs. The tax rate is 22 percent and the discount rate is 14 percent. The market value of the equipment over the life of the project is as follows: |

Year | Market Value ($ millions) | |||||

1 | $ | 14.20 | ||||

2 | 11.20 | |||||

3 | 8.70 | |||||

4 | 2.05 | |||||

a. |
Assuming Hand Clapper operates this project for four years, what
is the NPV? |

b-1 |
Compute the project NPV assuming the project is abandoned after
only one year. |

b-2 |
Compute the project NPV assuming the project is abandoned after
only two years. |

b-3 |
Compute the project NPV assuming the project is abandoned after
only three years. |

?

Answer #1

Sales | 13,300,000 |

Costs | 5,300,000 |

Depreciation | 4,050,000 |

EBT | 3,950,000 |

Tax (22%) | 869,000 |

Net Income | 3,081,000 |

Cash Flows (OCF) | 7,131,000 |

Operating Cash Flows = Net Income + Depreciation

a) Four year cash flows are as follows

Year | CF |

0 | -$17,220,000 |

1 | $7,131,000 |

2 | $7,131,000 |

3 | $7,131,000 |

4 | $9,750,000 |

Cash Flows (CF) = Investment + Working Capital + After-tax Salvage Value + OCF

NPV can be calculated using NPV function on a calculator or excel with 14% discount rate given the cash flows.

NPV = $5,108,340.69

b3) Similarly,

Year | CF |

0 | -$17,220,000 |

1 | $7,131,000 |

2 | $7,131,000 |

3 | $15,828,000 |

NPV = $5,205,785.26

b2)

Year | CF |

0 | -$17,220,000 |

1 | $7,131,000 |

2 | $18,669,000 |

NPV = $3,400,452.45

b1)

Year | CF |

0 | -$17,220,000 |

1 | $21,900,000 |

NPV = $1,990,526.32

A company has a single zero coupon bond outstanding that matures
in five years with a face value of $42 million. The current value
of the company’s assets is $32 million and the standard deviation
of the return on the firm’s assets is 38 percent per year. The
risk-free rate is 4 percent per year, compounded continuously.
a.
What is the current market value of the company’s equity?
(Do not round intermediate calculations and enter your
answer in dollars,...

9,
Quad Enterprises is considering a new three-year expansion
project that requires an initial fixed asset investment of $2.32
million. The fixed asset qualifies for 100 percent bonus
depreciation in the first year. The project is estimated to
generate $1.735 million in annual sales, with costs of $650,000.
The project requires an initial investment in net working capital
of $250,000, and the fixed asset will have a market value of
$180,000 at the end of the project. The tax rate...

Quad Enterprises is considering a new three-year expansion
project that requires an initial fixed asset investment of $2.32
million. The fixed asset falls into the three-year MACRS class
(MACRS schedule). The project is estimated to generate $1.735
million in annual sales, with costs of $650,000. The project
requires an initial investment in net working capital of $250,000,
and the fixed asset will have a market value of $180,000 at the end
of the project. The tax rate is 21 percent....

Down Under Boomerang, Inc., is considering a new 3-year
expansion project that requires an initial fixed asset investment
of $2.38 million. The fixed asset will be depreciated straight-line
to zero over its 3-year tax life, after which it will be worthless.
The project is estimated to generate $1,805,000 in annual sales,
with costs of $715,000. The tax rate is 24 percent and the required
return is 12 percent.
What is the project’s NPV? (Do not round intermediate
calculations and enter...

M.V.P. Games, Inc., has hired you to perform a feasibility study
of a new video game that requires an initial investment of $7.6
million. The company expects a total annual operating cash flow of
$1.36 million for the next 10 years. The relevant discount rate is
10 percent. Cash flows occur at year-end.
a.
What is the NPV of the new video game? (Do not round
intermediate calculations and enter your answer in dollars, not
millions of dollars, rounded to...

Bluegrass Mint Company has a debt-equity ratio of .20. The
required return on the company’s unlevered equity is 11.8 percent
and the pretax cost of the firm’s debt is 5.6 percent. Sales
revenue for the company is expected to remain stable indefinitely
at last year’s level of $18,700,000. Variable costs amount to 55
percent of sales. The tax rate is 21 percent and the company
distributes all its earnings as dividends at the end of each
year.
a.
If...

Bluegrass Mint Company has a debt-equity ratio of .35. The
required return on the company’s unlevered equity is 12.1 percent
and the pretax cost of the firm’s debt is 5.9 percent. Sales
revenue for the company is expected to remain stable indefinitely
at last year’s level of $19,000,000. Variable costs amount to 60
percent of sales. The tax rate is 24 percent and the company
distributes all its earnings as dividends at the end of each
year.
a.
If...

Bluegrass Mint Company has a debt-equity ratio of .45. The
required return on the company’s unlevered equity is 12.3 percent
and the pretax cost of the firm’s debt is 6.1 percent. Sales
revenue for the company is expected to remain stable indefinitely
at last year’s level of $19,200,000. Variable costs amount to 65
percent of sales. The tax rate is 21 percent and the company
distributes all its earnings as dividends at the end of each
year.
a.
If...

Bluegrass Mint Company has a debt-equity ratio of .40. The
required return on the company’s unlevered equity is 13.4 percent
and the pretax cost of the firm’s debt is 7.2 percent. Sales
revenue for the company is expected to remain stable indefinitely
at last year’s level of $20,300,000. Variable costs amount to 55
percent of sales. The tax rate is 22 percent and the company
distributes all its earnings as dividends at the end of each
year.
a.
If...

Quad Enterprises is considering a new three-year expansion
project that requires an initial fixed asset investment of $2.38
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 $1,805,000 in
annual sales, with costs of $715,000. The tax rate is 24 percent
and the required return on the project is 12 percent. What is the
project’s NPV? (Do not round intermediate
calculations....

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 9 minutes ago

asked 20 minutes ago

asked 22 minutes ago

asked 44 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago