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Please look at attached document 10-8 Edelman...




Please look at attached document 10-8 Edelman Engineering is considering including two pieces of equipment, a truck and an ovefrhead pulley system, in this year?s capital budget. The projects are independent. The cash outlay for the truck is $17,100 and that for the pulley system is $22,430. The firm?s cost of capital is 14%. After-tax cash flows, including depreciation, are as follows: Year Truck Pulley 1 5,100 7,500 2 5,100 7,500 3 5,100 7,500 4 5,100 7,500 5 5,100 7,500 Calculate the IRR, the NPV and the MIRR for each project, and indicate the correct accept/reject decision for each. 10-9 David Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost $22,000 and the gas-powered truck will cost $17,500. The cost of capital for both is 12%. The life for both is 6 years. The cash flows for the electric powered truck is $6,290 per year and those for the gas-powered truck will be $5,000 per year. Calculate NPV, IRR and decide which to recommend. 11-2 Cairn 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: Projected 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)? 11-3 Allen 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? ********************************************************************************** New-Project Analysis 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? TIPS and breakdown for above In part a, you will determine the net cost of the spectrometer by recognizing the price, modification costs and change in net working capital. 2. In part b, you will calculate the net cash flow for each year. This will essentially be the sum of the after tax savings plus the depreciation shield. To get the after tax savings, multiple the before-tax savings by 1-T. The depreciation shield is the annual depreciation expense multipled by the tax rate. The depreciation expense in each year is the depreciable basis times the MACRS allowance percentage of 0.33, 0.45, and 0.15 for Years 1, 2 and 3, respectively. 3. In part c, you will calculate the end of project cash flow as the sum of the salvage value minus the tax on the salvage value plus the return of net working capital. The tricky part is calculating the tax on the salvage value, which is the (salvage value minus the remaining book value) multiplied by the tax rate. How about a check figure for the remaining Year 4 book value? The remaining BV in Year 4 = $85,000(0.07) = $5,950. 4. In part d, you will calculate the NPV for the project. Part B: Make sure to use the depreciable base of $85,000 instead of $55,000. Part C: In determining the tax on salvage value, make sure that you first subtract the remaining book value in Year 4. Part D: When calculating NPV in Excel, use Excel to calculate the present value of the cash inflows. You will then need to subtract the cost manually from this total. In addition, make sure that the salvage value is incorporated into the Year 4 cash flow.


Paper#8793 | Written in 18-Jul-2015

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