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## Final unit 8 all solutions with steps Points Received:4 of 4 1.Question: 1. Blanchford Enterprises is considering a project that has the follow...

2011-10-14
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Final

unit 8

all solutions with steps

Points Received:4 of 4

1.Question:

1.  Blanchford Enterprises is considering a project that has the following cash flow and WACC data.  What is the project\'s NPV?  Note that a project\'s projected NPV can be negative, in which case it will be rejected.

WACC = 10%

Year:                   0                      1                     2                     3                     4

Cash flows:       -\$1,000            \$475                \$475                \$475                \$475

\$482.16

\$496.38

\$505.69

\$519.05

\$524.72

Points Received:4 of 4

2.Question:

Tapley Dental Associates is considering a project that has the following cash flow data.  What is the project\'s payback?

Year:                 0                     1                     2                     3               4                   5

Cash flows:       -\$1,000          \$300               \$310              \$320             \$330           \$340

2.11 years

2.50 years

2.71 years

3.05 years

3.21 years

Points Received:4 of 4

3.Question:

Ryngaert Medical Enterprises is considering a project that has the following cash flow and WACC data.  What is the project\'s NPV? Note that a project\'s projected NPV can be negative, in which case it will be rejected.

WACC = 10%

Year:                   0                          1                     2                     3                     4

Cash flows:       -\$1,000            \$400                \$405                \$410                \$415

\$241.24

\$255.83

\$268.54

\$274.78

\$289.84

Points Received:4 of 4

4.Question:

Rockmont Recreation Inc. is considering a project that has the following cash flow data.  What is the project\'s IRR? Note that a project\'s projected IRR can be less than the WACC (and even negative), in which case it will be rejected.

Year:                   0                        1                     2                     3                     4

Cash flows:       -\$1,000            \$250                \$230                \$210                \$190

-5.15%

-3.44%

-1.17%

2.25%

3.72%

Points Received:4 of 4

5.Question:

A company is analyzing two mutually exclusive projects, S and L, with the following cash flows:

0                      1                      2                      3                      4

Project S          -\$1,000            \$900                \$250                \$10                  \$10

Project L          -\$1,000            \$0                    \$250                \$\$400              \$800

The company\'s WACC is 10 percent.  What is the IRR of the better project?  (Hint:  Note that the better project may or may not be the one with the higher IRR.)

Points Received:4 of 4

6.Question:

You must evaluate a proposal to buy a new milling machine.  The base price is \$108,000, and shipping and installation costs would add another \$12,500.  The machine falls into the MACRS 3-year class, and it would be sold after 3 years for \$65,000.  The applicable depreciation rates are 33, 45, 15 and 7 percent as discussed in Appendix 12A of your text book.  The machine would require a \$5,500 increase in working capital (increased inventory less increased accounts payable).  There would be no effect on revenues, but pre-tax labor costs would decline by \$44,000 per year.  The marginal tax rate is 35 percent, and the WACC is 12 percent.  Also, the firm spent \$5,000 last year investigating the feasibility of using the machine.

How should the \$5,000 spent last year be handled?

Points Received:4 of 4

7.Question:

You must evaluate a proposal to buy a new milling machine.  The base price is \$108,000, and shipping and installation costs would add another \$12,500.  The machine falls into the MACRS 3-year class, and it would be sold after 3 years for \$65,000.  The applicable depreciation rates are 33, 45, 15 and 7 percent as discussed in Appendix 12A of your text book.  The machine would require a \$5,500 increase in working capital (increased inventory less increased accounts payable).  There would be no effect on revenues, but pre-tax labor costs would decline by \$44,000 per year.  The marginal tax rate is 35 percent, and the WACC is 12 percent.  Also, the firm spent \$5,000 last year investigating the feasibility of using the machine.

What is the net cost of the machine for capital budgeting purposes, that is, the Year 0 project cash flow?

Points Received:4 of 4

8.Question:

You must evaluate a proposal to buy a new milling machine.  The base price is \$108,000, and shipping and installation costs would add another \$12,500.  The machine falls into the MACRS 3-year class, and it would be sold after 3 years for \$65,000.  The applicable depreciation rates are 33, 45, 15 and 7 percent as discussed in Appendix 12A of your text book.  The machine would require a \$5,500 increase in working capital (increased inventory less increased accounts payable).  There would be no effect on revenues, but pre-tax labor costs would decline by \$44,000 per year.  The marginal tax rate is 35 percent, and the WACC is 12 percent.  Also, the firm spent \$5,000 last year investigating the feasibility of using the machine.

What are the net operating cash flows during Years 1, 2 and 3?

Points Received:4 of 4

9.Question:

You must evaluate a proposal to buy a new milling machine.  The base price is \$108,000, and shipping and installation costs would add another \$12,500.  The machine falls into the MACRS 3-year class, and it would be sold after 3 years for \$65,000.  The applicable depreciation rates are 33, 45, 15 and 7 percent as discussed in Appendix 12A of your text book.  The machine would require a \$5,500 increase in working capital (increased inventory less increased accounts payable).  There would be no effect on revenues, but pre-tax labor costs would decline by \$44,000 per year.  The marginal tax rate is 35 percent, and the WACC is 12 percent.  Also, the firm spent \$5,000 last year investigating the feasibility of using the machine.

What is the terminal year cash flow?

Points Received:4 of 4

10.Question:

You must evaluate a proposal to buy a new milling machine.  The base price is \$108,000, and shipping and installation costs would add another \$12,500.  The machine falls into the MACRS 3-year class, and it would be sold after 3 years for \$65,000.  The applicable depreciation rates are 33, 45, 15 and 7 percent as discussed in Appendix 12A of your text book.  The machine would require a \$5,500 increase in working capital (increased inventory less increased accounts payable).  There would be no effect on revenues, but pre-tax labor costs would decline by \$44,000 per year.  The marginal tax rate is 35 percent, and the WACC is 12 percent.  Also, the firm spent \$5,000 last year investigating the feasibility of using the machine.

Should the machine be purchased?  Explain your answer.

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