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2. Nixon Communications is trying to estimate the...

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2. Nixon Communications is trying to estimate the first-year operating cash flow (at t = 1) for a proposed project. The financial staff has collected the following information: Project sales $10 million Operating costs (not including depreciation) $7 million Depreciation $2 million Interest expense $2 million The company faces a 40% tax rate. What is the project's operating cash flow for the first year (t = 1)? 3. Carter Air Lines is now in the terminal year of a project. The equipment originally cost $20 million, of which 80% has been depreciated. Carter can sell the used equipment today to another airline for $5 million, and its tax rate is 40%. What is the equipment?s after-tax net salvage value? 4. The Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine?s base price is $108,000, and it would cost another $12,500 to modify it for special use. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,000. The machine would require an increase in net working capital (inventory) of $5,500. The milling machine would have no effect on revenues, but it is expected to save the firm $44,000 per year in before tax operating costs, mainly labor. Campbell?s marginal tax rate is 35%. a. What is the net cost of the machine for capital budgeting purposes? (That is, what is the Year 0 net cash flow?) b. What are the net operating cash flows in Years 1, 2, and 3? c. What is the additional Year 3 cash flow (that is, the after-tax salvage and the return of working capital)? d. If the project?s cost of capital is 12%, should the machine be purchased? 5. You have been asked by the president of your company to evaluate the proposed acquisition of a new spectrometer for the firm?s R&D department. The equipment?s basic price is $70,000, and it would cost another $15,000 to modify it for special use by your firm. The spectrometer, which falls into the MACRS 3-year class, would be sold after 3 years for $30,000. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,000. The spectrometer would have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firm?s marginal federal-plus-state tax rate is 40%. a. What is the net cost of the spectrometer? (That is, what is the Year 0 net cash flow?) b. What are the net operating cash flows in Years 1, 2, and 3? c. What is the additional (nonoperating) cash flow in Year 3? d. If the project?s cost of capital is 10%, should the spectrometer be purchased?,Will you be able to have the assignment done by tommorrow. Here are the answers???? These are the answers. (12-1) $12,000,000. (12-2) $2,600,000. (12-3) $4,600,000. (12-4) a. _$126,000. b. $42,518; $47,579; $34,926. c. $50,702. d. NPV _ $10,841; Purchase. (12-5) a. ($89,000). b. $26,220; $30,300; $20,100. c. $24,380. d. NPV __$6,704; Don?t,did you ger my message

 

Paper#11970 | Written in 18-Jul-2015

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