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Question;The Target Copy Company is contemplating the;replacement of its oldprinting machine with a new model costing;$60,000. The old machine, which;originally cost $40,000, has 6 years of expected life remaining and a current;book value of $30,000 versus a current market value of $24,000. Target's corporate tax rate is 40 percent. If;Target sells the old machine at market value, what is the initial after-tax;outlay for the new printing machine?;a. -$22,180;b. -$30,000;c. -$33,600;d. -$36,000;e. -$40,000;[i]. Dandy;Product's overall weighted average required rate of return is 10 percent. Its;yogurt division is riskier than average, its fresh produce division has average;risk, and its institutional foods division has below-average risk. Dandy;adjusts for both divisional and project risk by adding or subtracting 2;percentage points. Thus, the maximum adjustment is 4 percentage points. What is;the risk-adjusted required rate of return for a low-risk project in the yogurt;division?;a. 6%;b. 8%;c. 10%;d. 12%;e. 14%;Medium;[MACRS table required];[ii]. Mars;Inc. is considering the purchase of a new machine which will reduce;manufacturing costs by $5,000 annually.;Mars will use the MACRS accelerated method to depreciate the machine;and it expects to sell the machine at the end of its 5-year operating life for;$10,000. The firm expects to be able to;reduce net operating working capital by $15,000 when the machine is installed;but required working capital will return to the original level when the machine;is sold after 5 years. Mars's marginal;tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate;projects of this nature. If the machine;costs $60,000, what is the project?s NPV?;a. -$15,394;b. -$14,093;c. -$58,512;d. -$21,493;e. -$46,901;[MACRS table required];[iii]. Stanton;Inc. is considering the purchase of a new machine which will reduce;manufacturing costs by $5,000 annually and increase earnings before;depreciation and taxes by $6,000 annually.;Stanton;will use the MACRS method to depreciate the machine, and it expects to sell the;machine at the end of its 5-year operating life for $10,000 before taxes. Stanton's;marginal tax rate is 40 percent, and it uses a 9 percent cost of capital to;evaluate projects of this type. If the;machine's cost is $40,000, what is the project's NPV?;a. $1,014;b. $2,292;c. $7,550;d. $ 817;e. $5,040;[iv]. Parker Products;manufactures a variety of household products. The company is considering;introducing a new detergent. The;company?s CFO has collected the following information about the proposed;product. (Note: You may or may not need;to use all of this information, use only the information that is relevant.);?;The project has an anticipated;economic life of 4 years.;?;The company will have to;purchase a new machine to produce the detergent. The machine has an up-front cost (t = 0) of;$2 million. The machine will be depreciated on a straight-line basis over 4;years (that is, the company?s depreciation expense will be $500,000 in each of;the first four years (t = 1, 2, 3, and 4).;The company anticipates that the machine will last for four years, and;that after four years, its salvage value will equal zero.;?;If the company goes ahead with;the proposed product, it will have an effect on the company?s net operating;working capital. At the outset, t = 0;inventory will increase by $140,000 and accounts payable will increase by;$40,000. At t = 4, the net operating;working capital will be recovered after the project is completed.;?;The detergent is expected to;generate sales revenue of $1 million the first year (t = 1), $2 million the;second year (t = 2), $2 million the third year (t = 3), and $1 million the;final year (t = 4). Each year the;operating costs (not including depreciation) are expected to equal 50 percent;of sales revenue.;?;The company?s interest expense;each year will be $100,000.;?;The new detergent is expected;to reduce the after-tax cash flows of the company?s existing products by;$250,000 a year (t = 1, 2, 3, and 4).;?;The company?s overall WACC is;10 percent. However, the proposed;project is riskier than the average project for Parker, the project?s WACC is;estimated to be 12 percent.;?;The company?s tax rate is 40;percent.;What is the net present;value of the proposed project?;a.;-$ 765,903.97;b. -$1,006,659.58;c. -$;824,418.62;d. -$;838,997.89;e. -$;778,583.43;[v]. Virus;Stopper Inc., a supplier of computer safeguard systems, uses a cost of capital;of 12 percent to evaluate average-risk projects, and it adds or subtracts 2;percentage points to evaluate projects of more or less risk. Currently, two;mutually exclusive projects are under consideration. Both have a cost of;$200,000 and will last 4 years. Project A, a riskier-than-average project, will;produce annual end of year cash flows of $71,104. Project B, of less than;average risk, will produce cash flows of $146,411 at the end of Years 3 and 4;only. Virus Stopper should accept;a. B;with a NPV of $10,001.;b. Both;A and B because both have NPVs greater than zero.;c. B;with a NPV of $8,042.;d. A;with a NPV of $7,177.;e. A;with a NPV of $15,968.;%.


Paper#50983 | Written in 18-Jul-2015

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