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MANAGERIAL FINANCE Assignment

This document contains 4 assignment questions regarding net present value (NPV) calculations for new capital investment projects. Question 1 asks to calculate the after-tax net salvage value of equipment. Question 2 involves evaluating the purchase of a new milling machine by determining cash flows, depreciation, and calculating NPV. Question 3 asks to calculate the NPV of a new machine that would reduce manufacturing costs. Question 4 provides details on a proposed printer cartridge production project and asks to determine the required investment, cash flows, depreciation, and whether the project should be accepted based on its NPV.

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704 views2 pages

MANAGERIAL FINANCE Assignment

This document contains 4 assignment questions regarding net present value (NPV) calculations for new capital investment projects. Question 1 asks to calculate the after-tax net salvage value of equipment. Question 2 involves evaluating the purchase of a new milling machine by determining cash flows, depreciation, and calculating NPV. Question 3 asks to calculate the NPV of a new machine that would reduce manufacturing costs. Question 4 provides details on a proposed printer cartridge production project and asks to determine the required investment, cash flows, depreciation, and whether the project should be accepted based on its NPV.

Uploaded by

fahim zaman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MANAGERIAL FINANCE (MA)

ASSIGMENT QUESTIONS FOR CHAPTER 12

1. Net salvage value Kennedy Air Services is now in the final year of a project. The
equipment originally cost $20 million, of which 80 percent has been depreciated.
Kennedy can sell the used equipment today for $5 million, and its tax rate is 40 percent.
What is the equipment’s after-tax net salvage value? (4.6m)

2. New project analysis You must evaluate a proposal to buy a new milling machine. The
base price is $108,000, and shipping and installation costs would add another $12,500.
The machine falls into the MACRS 3-year class, and it would be sold after 3 years for
$65,000. The applicable depreciation rates are 33, 45, 15, and 7 percent as discussed in
Appendix 12A. If the machine is acquired, there will be a $1,000 increase in cash, $3,000
increase in short term investments, $4,000 increase in accounts receivable, and $5,000
increase in inventory. On the other hand accounts payable will increase by $3,000,
accruals will increase by $1,500, and notes payable will increase by $1,000. There
would be no effect on revenues, but pre-tax labor costs would decline by $44,000 per
year. The marginal tax rate is 35 percent, and the WACC is 12 percent. Also, the firm
spent $5,000 last year investigating the feasibility of using the machine.
a. How should the $5,000 spent last year be handled? (Sunk cost)
b. What is the net cost of the machine for capital budgeting purposes, that is, the
Year 0 project cash flow? (Tk 126,000)
c. What are the net operating cash flows during Years 1, 2, and 3?
(OCF: 42517.75 47578.75 34926.25)
d. What is the terminal year cash flow? (TCF: 50702.25)
e. Should the machine be purchased? Explain your answer. (NPV = 10,840, the
machine should be purchased)

3. New project analysis Holmes Manufacturing is considering a new machine that costs
$250,000 and would reduce pre-tax manufacturing costs by $90,000 annually. Holmes
would use the 3-year MACRS method to depreciate the machine, and management
thinks the machine would have a value of $23,000 at the end of its 5-year operating life.
The applicable depreciation rates are 33, 45, 15, and 7 percent as discussed in Appendix
12A. Working capital would increase by $25,000 initially, but it would be recovered at
the end of the project’s 5-year life. Holmes’s marginal tax rate is 40 percent, and a 10
percent WACC is appropriate for the project. Calculate the project’s NPV. Should the
project be taken? Explain. (NPV= 37,035, the project should be taken)

4. New Project analysis As a financial analyst, you must evaluate a proposed project to
produce printer cartridges. The equipment would cost $55,000, plus $10,000 for
installation. Annual sales would be 4,000 units at a price of $50 per cartridge, and the
project’s life would be 3 years. Current assets would increase by $5,000 and payables
by $3,000. At the end of 3 years the equipment could be sold for $10,000. Depreciation
would be based on the MACRS 3-year class, so the applicable rates would be 33, 45, 15,
and 7 percent. Variable costs would be 70 percent of sales revenues, fixed costs
excluding depreciation would be $30,000 per year, the marginal tax rate is 40 percent,
and the corporate WACC is 11 percent.
a. What is the required investment, that is, the Year 0 project cash flow? (Tk
67000)
b. What are the annual depreciation charges?
c. What is the terminal cash flow? (TCF= 9820)
d. What are the net operating cash flows in Years 1, 2, and 3?
( OCF: 44580 47700 39900)
e. What are the annual project cash flows? (-67000, 44580, 47700, 49720)
f. If the project is of average risk, what is its NPV, and should it be accepted?
(NPV= 48,231, the project should be accepted)

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