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Finance Two Exercises - 11.1 and 11.2




Question;Exercise 11.1.?Integrative?Determining Relevant Cash FlowStanforth Research is evaluating the purchase of a highly sensitive temperature measurement equipment (TME) device. The new device will replace an existing piece of equipment that was purchased two years ago for $60,000 and is being depreciated using a five-year recovery period under ACRS. This equipment has 5 years of useful life and 4 years of depreciation expense (Years 3,4,5,6) remaining. The new TME will cost $105,000 plus $3,000 to install and is expected to remain useful for 5 years. The projected profits before depreciation and taxes are shown for both pieces of equipment. The existing equipment can currently be sold for $25,000. The firm is subject to a 40% tax rate on both ordinary income and capital gains and has a required return of 7% on projects of this nature.Profits before Depreciation and TaxesYear ExistingEquipment NewTME1 $156,000 $175,0002 160,000 175,0003 160,000 180,0004 165,000 180,0005 $170,000 $185,000a. Calculate the initial investment associated with the purchase of the new TME.b. Calculate the incremental operating cash inflows associated with the replacement of the existing equipment. (Note: Be sure to consider the depreciation in Year 6.)c. Calculate the payback, NPV, and IRR of this project.Exercise 11.2.?NPV and RADRThe Happy Pappy Puppy Company has compiled the following data for adding a new line of pets to their stores. The chief analyst, Bill, has chosen to use the RADR model. What NPV is calculated using this method? The initial investment in the project is $45,000. The firm?s cost of capital is 12%, however projects in this risk class have a 14% required rate of return. The risk-free rate is 8%.Year Cash Inflow1 $23,0002 19,0003 15,0004 13,0005 $10,000


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