Capital budgeting problem

Assignment Help Finance Basics
Reference no: EM131115374

Capital Budgeting Problem

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. The truck's basic price is $50,000, and it will cost another $10,000 to modify it for special use by your firm. The truck falls into the MACRS three-year class, with depreciation rates of 33 percent, 45 percent, 15 percent, and 7%, and it will be sold after three years for $20,000. Use of the truck will require an immediate increase in net operating working capital (spare parts inventory) of $2,000. The truck would increase the firm's before-tax revenues by $25,000 per year but would also increase operating costs (excluding depreciation) by $5,000 per year. The firm's marginal tax rate is 40 percent and the relevant cost of capital is 10%. Assume that the company has other profitable projects so that any operating losses on this project will be used to offset taxable operating income on other projects.

You must develop a full solution (in spreadsheet format) to this problem before answering the questions.

A) What is the net investment in the truck at t = 0?

B) What are the net operating cash flows?

  • What is the terminal (salvage, non-operating) cash flow at the end of Year 3?
  • What is the Payback for this investment?
  • What is the NPV of this investment?
  • What is the IRR of this investment?
  • Should this investment be undertaken? Why?

Reference no: EM131115374

Questions Cloud

What is probability that the project will result in loss : The management of Madeira Manufacturing Company is considering the introduction of a new product. The fixed cost to begin the production of the product is $33,000. The variable cost for the product is uniformly distributed between $20 and $27 per uni..
What is the no arbitrage us dollar price of one adr : At this exchange rate, what is the no-arbitrage U.S. dollar price of one ADR? By comparison, Honda ADRs traded at $30.96. Do you think an arbitrage opportunity exists?
Find the percent voltage regulation : When the transformer is delivering rated kVA to a load at rated secondary voltage and a 0.85 lagging power factor, find the percent voltage regulation and the efficiency of the transformer.
Prepare the journal entries for any impairment loss : Prepare the journal entries for any impairment loss occurring at 30 June2015. Carrying amount of assets=$1 500 000 and Recoverable amount=$1 420 000
Capital budgeting problem : You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. The truck's basic price is $50,000, and it will cost another $10,000 to modify it for special use by your firm. The truck fal..
What are the potential tax consequences for the corporation : What is the difference between a liquidating and non-liquidating distribution? What are the potential tax consequences for the corporation? How do the potential tax consequences differ for the shareholders?
Explain to her the various payroll deductions : Faith Battle operates a health food store, and she has been the only employee. Her business is growing, and she is considering hiring some additional staff to help her in the store.
What new discovery did the scientists discover : What new discovery did the scientists discover and what does this possibly tell us about the earth, life, and any other "big" picture as stated in the article.
Consulting firm submitted bid for large research project : A consulting firm submitted a bid for a large research project. The firms management initially felt there was a 50/50 chance of getting the bid. However, the agency to which the bid was submitted subsequently requested additional information on the b..

Reviews

Write a Review

Finance Basics Questions & Answers

  The company uses a discount rate of 19 when computing the

yandell inc. is considering an investment project that would require an initial investment of 310000 and that would

  What is aol enterprise value

What is AOL's enterprise value?

  Forward contracts questions

1.  Which of the following is most accurate regarding derivatives?

  Background information on the firm

The Shocking Demise of Mr. Thorndike, Prepare a PowerPoint presentation to be presented in class (blackboard) and an Excel worksheet backup that address the case study question(s) and provides:

  Prepare a report of the pertinent information

Messineo LLC borrowed $15,000 at a 14% annual rate of interest to be repaid over 3 years. The loan is amortized into three equal annual end of year payments. As the CFO of Messineo, LLC you must prepare a report of the pertinent information in a s..

  What dollar amount of deposits can the bank have

A new bank has vault cash of $1 million and $5 million in deposits held at its Federal Reserve District Bank

  What should be the price of baldwin stock today

Baldwin Corp. just paid a dividend of $2.00. Over the next two years this dividend is expected to grow by 20% per year. After two years, dividend growth is expected to level off at 10%. If the required rate of return on Baldwin stock is 12%, what ..

  Asume that you purchased an 8 percent 20-year 1000 par

assume that you purchased an 8 percent 20-year 1000 par semiannual payment bond priced at 1012.50 when it has 12 years

  What is the approximate percentage cost

Dixie Tours Inc. buys on terms of 4/15, net 30. It does not take discounts, and it typically pays 35 days after the invoice date. Net purchases amount to $720,000 per year. What is the approximate percentage cost of its non-free trade credit?

  Happy valley homecare suppliers inc hvhs had 20 million in

happy valley homecare suppliers inc. hvhs had 20 million in sales in 2010. its cost of goods sold was 8 million and

  Risks associated with the aggressive and conservative plan

Christensen and Associates is development an asset financing plan. Christensen has $500,000 in current assets of which 15 percent are permanent, and $700,000 in fixed assets.

  Comparison between two stocks and computing

Use the following information. You have the following information on the two securities in which you have invested

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd