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Problem Set 2: FIN 401: Financial Management Syed Waqar Ahmed

This document contains 3 problems related to financial management and net present value (NPV) analysis. Problem 1 provides information about a project with a 3-year life, annual revenue increases of $220,000 and cost reductions of $10,000, and asks to determine the project's fate using NPV. Problem 2 gives details about an automation project with an 8-year life, annual operating expense savings of $240,000, and time-varying salvage values, instructing to use NPV. Problem 3 centers around replacing an old 5-year asset with a new one, noting changes in costs, revenues, expenses, and asking to evaluate using NPV.

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128 views3 pages

Problem Set 2: FIN 401: Financial Management Syed Waqar Ahmed

This document contains 3 problems related to financial management and net present value (NPV) analysis. Problem 1 provides information about a project with a 3-year life, annual revenue increases of $220,000 and cost reductions of $10,000, and asks to determine the project's fate using NPV. Problem 2 gives details about an automation project with an 8-year life, annual operating expense savings of $240,000, and time-varying salvage values, instructing to use NPV. Problem 3 centers around replacing an old 5-year asset with a new one, noting changes in costs, revenues, expenses, and asking to evaluate using NPV.

Uploaded by

Jitesh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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FIN 401: Financial Management

Syed Waqar Ahmed

Problem Set 2
Problem 1

(5.0 Marks)

Based on the information provided below, decide the fate of the project using NPV analysis:
Project Information:

Cost of equipment = $400,000

Shipping & installation will be $20,000

$25,000 in net working capital required at setup

3-year project life, 5-year class life

Simplified straight line depreciation

Revenues will increase by $220,000 per year

Defects costs will fall by $10,000 per year

Operating costs will rise by $30,000 per year

Salvage value after year 3 is $200,000

Cost of capital = 12%, marginal tax rate = 34%

FIN 401: Financial Management

Syed Waqar Ahmed

Problem 2

(7.0 Marks)

Based on the information provided below, decide the fate of the project using NPV analysis:
Automation Project:

Cost of equipment (shipped & Installed) = $575,000

$15,000 in net working capital required at setup

8-year project life, 5-year class life

Simplified straight line depreciation

Current operating expenses are $640,000 per yr.

New operating expenses will be $400,000 per yr.

Already paid consultant $25,000 for analysis.

Salvage value at the end of different years will follow the following schedule:

Years
1
2
3
4
5

Salvage Value
$100,000
$75,000
$40,000
$30,000
$20,000

Cost of capital = 14%, marginal tax rate = 34%

FIN 401: Financial Management

Problem 3

Syed Waqar Ahmed

(8.0 Marks)

Based on the information provided below, decide the fate of the project using NPV analysis:
Replacement Project:
Old Asset (5 years old):

Cost of equipment = $1,125,000

10-year project life, 10-year class life

Simplified straight line depreciation

Current salvage value is $400,000

Cost of capital = 14%, marginal tax rate = 35%

New Asset:

5-year class life

Cost of equipment = $1,750,000

Shipping & installation will be $56,000

Simplified straight line depreciation

$68,000 in net working capital required when setting up new Asset

Will increase sales by $285,000 per year

Operating expenses will fall by $100,000 per year

Already paid $15,000 for training program

Salvage value after year 5 is $500,000

Cost of capital = 14%, marginal tax rate = 35%

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