Lab 12 Problems
2. Given the following information, calculate the NPV of a proposed project: Initial Cost = $4,000; estimated life = 3 years; initial decrease in accounts receivable = $1000, which must be restored at the end of the project's life; estimated salvage value = $1,000; the investment increases net income before taxes and depreciation = $2,000 per year; method of depreciation = 3-year MACRS (33%, 45%, 15%, 7%); tax rate = 40 percent; required rate of return = 18 percent.
3. Mars Inc. is considering the purchase of a new machine, which will reduce manufacturing costs by $5,000 annually. Mars will use 5-year MACRS (percentages: 20, 32, 19, 12, 11, 6) to depreciate the machine, and it expects to sell the machine at the end of its 5year operating life for $10,000. The firm expects to be able to reduce net 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' marginal tax rate is 40 percent, and it uses a 12 percent required rate of return to evaluate projects of this nature. If the machine costs $60,000, what is the NPV of the project?
4. Replacement Problem. Meals on Wings Inc. supplies prepared meals for corporate aircraft (as opposed to public commercial airlines), and it needs to purchase new broilers. If the broilers are purchased, they will replace old broilers purchased 10 years ago for $105,000 and which are being depreciated on a straight line basis to a zero salvage value (15year depreciable life). The old broilers can be sold today for $60,000, but will have no market value in 5 years. The new broilers will cost $200,000 installed and will be depreciated using MACRS over their 5year class life (percentages in problem 3); they will be sold at their book value at the end of the 5th year. The firm expects to increase its revenues by $18,000 per year if the new broilers are purchased, but cash expenses will also increase by $2,500 per year. If the firm's required rate of return is 10 percent and its tax rate is 34 percent, what is the NPV of the broilers?
5. Replacement Problem
This problem 9-9 may have been used elsewhere, with some modifications.
Galveston Shipyards is considering the replacement of an eight-year-old riveting machine with a new one that will increase earnings before depreciation from $27,000 per year to $54,000 per year. The new machine will cost $82,500, and it will have an operating life of eight years and no salvage value (zero market value) at the end of the 8 years. The new machine will be depreciated using the five-year MACRS class life. The firm’s marginal tax rate is 40 percent, and the firm’s required rate of return is 12 percent. The old machine is fully depreciated with an adjusted basis of zero. It is worth $10,000 if you sold it today, and will be worth $2000 if you keep it for another 8 years. Should the old riveting machine be replaced by the new one?
Key lab 12 problems
Keys for all problems are available in spreadsheet form.