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Garcia’s Truckin’ Inc. is considering the purchase of a new production machine for $200,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $50,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $5,000 after tax. In addition, it would cost $5,000 after tax to install this machine properly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $20,000. This machine has an expected life of 10 years, after which it will have no salvage value. Finally, to purchase the new machine, it appears that the firm would have to borrow $100,000 at 8 percent interest from its local banks, resulting in additional interest payments of $8,000 per year. Assume simplified straight-line depreciation and that this machine is being depreciated down to zero, a 34 percent marginal tax, and a required rate of return of 10 percent. (a) What is the initial outlay associated with this project? (b) What are the annual after-tax cash flows associated with this project for years 1 through 9? (c) What is the terminal cash flow in year 10 (what is the annual after-tax cash flow in year 10 plus any additional cash flows associated with termination of the project)? (d) Should the machine be purchased?
In column J, enter a formula to calculate the insurance cost if the renter has elected insurance coverage (Yes in column E). Use the instrument’s group code and the Monthly Insurance column in the RentalCharges table to look up the insurance cost. Re..
Jennifer was awarded damages of $150,000 in a successful lawsuit she brought against her employer 6 years ago. Simple interest on the judgment accrues at the rate of 15%/year from the date of filing. If the case were settled today, how much would Jen..
Honest John's Car Dealership advertises his "understandable" financing plan on car purchases as follows. You pay 10% of the car's full price up front and 4% of the car's full price in 30 equal end-of-month payments For instance, if a car cost $15,000..
A firm is anticipated to produce a $10,000 cash flow in year 1, $2,500 cash flows in years 2 through 4, and then will pay a steady stream of $1,250 cash flows into the foreseeable future (i.e. forever). Also, the firm has a weighted average cost of c..
Alcott's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $55.00, what is its nominal (not effective) annual rate of return?
Cochrane, INC., is considering a new three-year expansion project that requires an intial fixed asset investment of 2,340,00. The fixed asset falls into the three-year MACRS class. The project is estimated to generate 2,230,000 in annual sales, with ..
Company Omega is undertaking a major investment. It is expected to cost 1 million in initial investment at t = 0, 1 million at t = 1 and 1 million at t =2. The investment is expected to generate at the end of year t = 2 a dividend flow of 1.0 milli..
Net working capital investment is important in capital budgeting cash flow analysis because:
Dinklage Corp. has 8 million shares of common stock outstanding. The current share price is $80, and the book value per share is $7. The company also has two bond issues outstanding. What are the company's capital structure weights on a book value ba..
Rip Van Winkle made a $1,000 deposit in a bank that offered to pay 9% interest compounded annually as long as he left it there. He then went into a deep sleep. When he woke up, his balance was $1,411.58. How many years did he sleep?
Margaret plans to deposit $500 on the first day of each of the next five years, beginning today. If she earns 4% compounded annually, how much will she have at the end of five years?
A project has cash flows of -$152,000, $60,800, $62,300 and $75,000 for years 0 to 3, respectively. The required rate of return is 13 percent. What is the profitability index? Should you accept or reject the project based on this index value?
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