Posted: January 22nd, 2022
1. A project has an initial cost of $50,000, expected net cash inflows of $11,000 per year for 9 years, and a cost of capital of 8%. What is the project’s IRR? Round your answer to two decimal places.
2. A project has an initial cost of $55,000, expected net cash inflows of $13,000 per year for 10 years, and a cost of capital of 8%. What is the project’s MIRR? (Hint: Begin by constructing a time line.) Do not round intermediate calculations. Round your answer to two decimal places.
3. A project has an initial cost of $40,000, expected net cash inflows of $11,000 per year for 7 years, and a cost of capital of 13%. What is the project’s payback period? Round your answer to two decimal places.
project’s payback period?________________
4. Although the Chen Company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,300 per year. It would have zero salvage value at the end of its life. The project cost of capital is 10%, and its marginal tax rate is 25%. Should Chen buy the new machine? Do not round intermediate calculations. Round your answer to the nearest cent. Negative value, if any, should be indicated by a minus sign.
NPV: $ _______________
Should Chen purchase the new machine?__________
5. The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer’s base price is $860,000, and it would cost another $18,000 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $468,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. The machine would require an increase in net working capital (inventory) of $14,000. The sprayer would not change revenues, but it is expected to save the firm $341,000 per year in before-tax operating costs, mainly labor. Campbell’s marginal tax rate is 25%. (Ignore the half-year convention for the straight-line method.) Cash outflows, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest dollar.
What is the Year-0 net cash flow?
What are the net operating cash flows in Years 1, 2, and 3?
Year 1:$ _________ Year 2:$ ______ Year 3:$_______
What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital)?
If the project’s cost of capital is 10%, what is the NPV of the project?
Should the machine be purchased?___________
6. Broussard Skateboard’s sales are expected to increase by 15% from $9.0 million in 2019 to $10.35 million in 2020. Its assets totaled $3 million at the end of 2019.
Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2019, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 3%, and the forecasted payout ratio is 55%. Use the AFN equation to forecast Broussard’s additional funds needed for the coming year. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Do not round intermediate calculations. Round your answer to the nearest dollar.
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