Question
In: Finance
9. Suppose Blue Thumb Tools is considering the introduction of a new, heavier hammer to be...
9. Suppose Blue Thumb Tools is considering the introduction of a new, heavier hammer to be used for driving spikes. The new hammer will cost $490,000. The cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the new hammer can be scrapped for $40,000. The new hammer will save the firm $146,000 per year in pretax operating costs, and it required an initial investment in net working capital of $35,000. The tax rate of the firm is 30%.
What are the cash flows of firm’s new project (using a time line)?
What is the net present value of this project (list your setups)?
What is the IRR of this project (list your setups)?
Please solve without excel so that I can see the steps.
Solutions
Expert Solution
| Step 1 | ||||||
| Calculation of the cash flows of firm’s new project | ||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
| Investment in a new hammer | -$490,000.00 | |||||
| Investment in net working capital | -$35,000.00 | |||||
| Savings in pre tax operating cost | $146,000.00 | $146,000.00 | $146,000.00 | $146,000.00 | $146,000.00 | |
| Tax @ 30% on savings in pre tax operating cost | -$43,800.00 | -$43,800.00 | -$43,800.00 | -$43,800.00 | -$43,800.00 | |
| Depreciation Tax shield | $29,400.00 | $29,400.00 | $29,400.00 | $29,400.00 | $29,400.00 | |
| After tax scarp value of new hammer | $28,000.00 | |||||
| Cash flows of firm's new project | -$525,000.00 | $131,600.00 | $131,600.00 | $131,600.00 | $131,600.00 | $159,600.00 |
| Step 2 | ||||||
| Calculation of the net present value of this project | ||||||
| We are unable to calculate the NPV as the project's required rate of return is not given in the question. | ||||||
| Step 3 | ||||||
| Calculation of the IRR of this project | ||||||
| Year | Cash flow | |||||
| 0 | - 525,000.00 | |||||
| 1 | 131,600.00 | |||||
| 2 | 131,600.00 | |||||
| 3 | 131,600.00 | |||||
| 4 | 131,600.00 | |||||
| 5 | 159,600.00 | |||||
| At Internal rate of return (IRR) , the net present value of project is equal to zero. | ||||||
| We can use the excel formula to calculate the IRR of the project. | ||||||
| IRR of the project | =IRR(B15:B20) | |||||
| IRR of the project | 9.36% | |||||
| Working | ||||||
| Calculation of depreciation tax shield | ||||||
| Depreciation per year on New machine = $490000 / 5 years = | $98,000.00 | |||||
| x Tax rate | 30% | |||||
| Depreciation Tax shield per year | $29,400.00 | |||||
| Calculation of after tax scarp value of new hammer | ||||||
| Scrap value | $40,000.00 | |||||
| Less : Tax @ 30% | $12,000.00 | |||||
| After tax scarp value of new hammer | $28,000.00 | |||||
jeff jeffy answered 9 months agoRelated Solutions
Suppose Blue Thumb Tools is considering the introduction of a new, heavier hammer to be used...
Suppose Blue Thumb Tools is considering the introduction of a
new, heavier hammer to be used for driving spikes. The new hammer
will cost $490,000. The cost will be depreciated straight-line to
zero over the project’s five-year life, at the end of which the new
hammer can be scrapped for $40,000. The new hammer will save the
firm $146,000 per year in pretax operating
costs, and it required an initial investment in net
working capital of $35,000. The tax rate...
Suppose Blue Thumb Tools is considering the introduction of a new, heavier hammer to be used...
Suppose Blue Thumb Tools is considering the introduction of a
new, heavier hammer to be used for driving spikes. The new hammer
will cost $490,000. The cost will be depreciated straight-line to
zero over the project’s five-year life, at the end of which the new
hammer can be scrapped for $40,000. The new hammer will save the
firm $146,000 per year in pretax operating costs, and it required
an initial investment in net working capital of $35,000. The tax
rate...
Please solve by hand, not using excel. No discount rate provided. Suppose Blue Thumb Tools is...
Please solve by hand, not using excel. No discount rate
provided.
Suppose Blue Thumb Tools is considering the introduction of a
new, heavier hammer to be used for driving spikes. The new hammer
will cost $490,000. The cost will be depreciated straight-line to
zero over the project’s five-year life, at the end of which the new
hammer can be scrapped for $40,000. The new hammer will save the
firm $146,000 per year in pretax operating
costs, and it required an...
The management of Blue Thumb Tools believes the firm’s current capital structure is optimal and intends...
The management of Blue Thumb Tools believes the firm’s current
capital structure is optimal and intends to maintain it in the
future. Blue Thumb’s bonds are selling for $950 each. Its common
stock is selling for $37 a share and its preferred stock is selling
for $88 per share. There are 50,000 bonds outstanding, 10,000,000
shares of stock and 3,000,000 shares of preferred stock
outstanding, respectively.
What are the current weights of Blue Thumb’s capital
structure?
Blue Thumb’s stock has...
Acme Tools is considering the purchase of a new machine. The total cost of the new...
Acme Tools is considering the purchase of a new machine. The
total cost of the new machine is $48,000 and it has a 9-year
service life with no salvage value at the end of nine years. The
annual cash inflow will be 16% of the cost of the machine. If the
appropriate cost of capital is 6.0 percent, what is the discounted
payback period?
A. less than 8.0 years
B. more than 8.0 years but less than 8.3 years
C....
"The Simon Machine Tools Company is considering purchasing a new set of machine tools to process...
"The Simon Machine Tools Company is considering purchasing a new
set of machine tools to process special orders. The following
financial information is available.
- Without the project, the company expects to have a taxable income
of $487,000 each year from its regular business over the next three
years.
- With the three-year project, the purchase of a new set of machine
tools at a cost of $54,000 is required. The equipment falls into
the MACRS three-year class. The tools...
Premium Company is considering the introduction of a new product that requires to purchase of a...
Premium Company is considering the introduction of a new product
that requires to purchase of a new industrial oven. The industrial
size oven will cost $960,000 and will be used for 5 years. The
company is in the 25% marginal tax bracket and has a required rate
of return of 11%. A once-off additional working capital requirement
of $35,000 is needed that will be liquidated at the end of year 5.
The accountant has forecasted that this oven would be...
The company is considering the introduction of a new product that is expected to reach sales...
The company is considering the introduction of a new product
that is expected to reach sales of $10 million in its first full
year and $13 million of sales in the second and third years.
Thereafter, annual sales are expected to decline to two-thirds of
peak annual sales in the fourth year and one-third of peak sales in
the fifth year. No more sales are expected after the fifth year.
The CGS is about 60% of the sales revenues in...
Rump Industries is considering the purchase of a new production machine for $100,000. The introduction of...
Rump Industries is considering the purchase of a new production
machine for $100,000. The introduction of the machine will result
in an increase in earnings before interest and tax of $25,000 per
year. Set-up of the machine will involve installation costs of
$5,000 after-tax. Additionally, the machine will require workers to
undergo training that will cost the company $5,000 after-tax. An
initial increase in raw materials and inventory of $25,000 will
also be required. The machine has an expected life...
Derby Phones is considering the introduction of a new model of headphones with the following price...
Derby Phones is considering the introduction of a new model of
headphones with the following price and cost characteristics:
Sales price
$
23
per unit
Variable costs
6
per unit
Fixed costs
24,000
per month
Assume that the projected number of units sold for the month is
7,000. Consider requirements (b), (c), and
(d) independently of each other.
Required:
a. What will the operating profit be?
b. What is the impact on operating profit if
the sales price decreases by...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Compare the MOSFET, JFET , and BJT and identify the reasons these devices behave differently. What...
- How would you use SAS Enterprise Miner to create a neural network model of your example?
- Explain the use of neural networking modeling in predictive analytics.
- Current Market Mix of Netflix, as detail as possible, please.
- This is all one question, thank you so much in advance! You must evaluate a proposal...
- X Company is considering the purchase of a new processor that costs $200,000. Shipping and setup...
- There are a large number of tasks involved in information technology and programming, and many of...
ADVERTISEMENT