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1. Compact fluorescent lamps (CFLs) have become...

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1. Compact fluorescent lamps (CFLs) have become more popular in recent years, but do they make financial sense? Suppose a typical 60-watt incandescent light bulb costs $0.30 and lasts 1,840 hours. A 15-watt CFL, which provides the same light, costs $3.60 and lasts for 9,660 hours. A kilowatt-hour of electricity costs $0.10, which is about the national average. A kilowatt-hour is 1,000 watts for 1 hour. An industrial user in West Virginia might pay $0.04 per kilowatt-hour whereas a residential user in Hawaii might pay $0.25. Required: If you require a 9.50 percent return and use a light fixture 460 hours per year, what?s the break-even cost per kilowatt-hour? 2. To solve the bid price problem presented in the text, we set the project NPV equal to zero and found the required price using the definition of OCF. Thus the bid price represents a financial break-even level for the project. This type of analysis can be extended to many other types of problems. Guthrie Enterprises needs someone to supply it with 144,000 cartons of machine screws per year to support its manufacturing needs over the next 5 years, and you've decided to bid on the contract. It will cost you $748,800 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. You estimate that in 5 years, this equipment can be salvaged for $48,000. Your fixed production costs will be $230,400 per year, and your variable production costs should be $8.16 per carton. You also need an initial investment in net working capital of $72,000. Your tax rate is 34 percent and you require a 20 percent return on your investment. Assume that the price per carton is $12. (a) The project NPV? (b) Number of cartons supplied per year to break even? (c) If you supply 144,000 cartons per year, how much in fixed costs can you afford and still break even? 3. Compact fluorescent lamps (CFLs) have become more popular in recent years, but do they make financial sense? Suppose a typical 60-watt incandescent light bulb costs $0.45 and lasts 420 hours. A 15-watt CFL, which provides the same light, costs $3.40 and lasts for 9,660 hours. Assume a kilowatt-hour of electricity costs $0.101. A kilowatt-hour is 1,000 watts for 1 hour. Required: If you require a 10 percent return and use a light fixture 420 hours per year, what is the equivalent annual cost of each light bulb? EAC for Compact Fluorescent lamps? 60 Watt incandescent light bulb? 4. After extensive medical and marketing research, Pill, Inc., believes it can penetrate the pain reliever market. It is considering two alternative products. The first is a medication for headache pain. The second is a pill for headache and arthritis pain. Both products would be introduced at a price of $5.27 per package in real terms. The headache-only medication is projected to sell 4.18 million packages a year, whereas the headache and arthritis remedy would sell 6.05 million packages a year. Cash costs of production in the first year are expected to be $2.43 per package in real terms for the headache-only brand. Production costs are expected to be $2.64 in real terms for the headache and arthritis pill. All prices and costs are expected to rise at the general inflation rate of 4 percent. Either product requires further investment. The headache-only pill could be produced using equipment costing $14.97 million. That equipment would last three years and have no resale value. The machinery required to produce the broader remedy would cost $20.97 million and last three years. The firm expects that equipment to have a $1.04 million resale value (in real terms) at the end of year 3. Pill, Inc., uses straight-line depreciation. The firm faces a corporate tax rate of 35 percent and believes that the appropriate real discount rate is 15 percent. First Alternative NPV? Second Alternative NPV? 5. Your firm is contemplating the purchase of a new $1,344,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $120,000 at the end of that time. You will save $528,000 before taxes per year in order processing costs and you will be able to reduce working capital by $177,994 (this is a one-time reduction). If the tax rate is 30 percent. IRR? 6. Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,140,000 and will last for 8 years. Variable costs are 35 percent of sales, and fixed costs are $127,000 per year. Machine B costs $4,760,000 and will last for 11 years. Variable costs for this machine are 31 percent and fixed costs are $119,000 per year. The sales for each machine will be $9,520,000 per year. The required return is 10 percent and the tax rate is 35 percent. Both machines will be depreciated on a straight-line basis. If the company plans to replace the machine when it wears out on a perpetual basis. Machine A, EAC? Machine B, EAC? 7. Your company has been approached to bid on a contract to sell 12,000 voice recognition (VR) computer keyboards a year for 4 years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $2.88 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $90,000 to be returned at the end of the project and the equipment can be sold for $240,000 at the end of production. Fixed costs are $600,000 per year, and variable costs are $198 per unit. In addition to the contract, you feel your company can sell 3,600, 7,200, 9,600, and 6,000 additional units to companies in other countries over the next four years, respectively, at a price of $330. This price is fixed. The tax rate is 38 percent, and the required return is 10 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $120,000. Bid price for the contract? 8. Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $178,500. The facility is to be fully depreciated on a straight-line basis over 7 years. It is expected to have no resale value after the 7 years. Operating revenues from the facility are expected to be $74,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 5.9 percent. Production costs at the end of the first year will be $19,000, in nominal terms, and they are expected to increase at 6.9 percent per year. The real discount rate is 8 percent. The corporate tax rate is 35 percent. Sanders has other ongoing profitable operations. NPV? 9. Yasmin Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $720,000 is estimated to result in $240,000 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $105,000. The press also requires an initial investment in spare parts inventory of $30,000, along with an additional $4,500 in inventory for each succeeding year of the project. If the shop's tax rate is 33 percent and its discount rate is 14 percent. NPV?

 

Paper#10287 | Written in 18-Jul-2015

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