Question

Please answer them correctly. Here are 2 short problems. Please solve all 2 problems. I would really appreciate your effort. Thanks.

1). Given the soaring price of gasoline, Ford is considering introducing a new production line of gas-electric hybrid sedans. The expected annual unit sales of the hybrid cars is 40,000; the price is $25,000 per car. Variable costs of production are $14,000 per car. The fixed overhead including salary of top executives is $80 million per year. However, the introduction of the hybrid sedan will decrease Ford’s sales of regular sedans by 6,000 cars per year; the regular sedans have a unit price of $20,000, a unit variable cost of $12,000, and fixed costs of $250,000 per year. Depreciation costs of the production plant are $52,000 per year. The marginal tax rate is 40 percent. What is the incremental annual cash flow from operations?

Incremental annual cash flow from operations $____________?

2). Crane Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $11.80 million. This investment will consist of $3.00 million for land and $8.80 million for trucks and other equipment. The land, all trucks, and all other equipment are expected to be sold at the end of 10 years for a price of $5.20 million, which is $2.15 million above book value. The farm is expected to produce revenue of $2.00 million each year, and annual cash flow from operations equals $1.90 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment. (Do not round factor values. Round final answer to 2 decimal places, e.g. 15.25.)

NPV $________?

The project should be "Accepted or Rejected?

Answer 1

1]

incremental annual cash flow from operations = cash flow from hybrid cars - cash flow lost on regular sedans

Depreciation tax shield need not be considered because it is not an incremental cash flow - the depreciation tax shield is same for both the regular sedans and hybrid cars since there is no new plant or equipment.

incremental annual cash flow from operations = $312,250,000

2]

Tax on salvage value = (sale price - book value) * tax rate = $2,150,000 * 35% = $752,500

Salvage value after tax = $5,200,00 - $752,500 = $4,447,500

Cash flow in year 10 = annual cash flow + salvage value after tax = $1,900,000 + $4,447,500 = $6,347,500

NPV is calculated using NPV function in Excel. NPV is $1,589,381.28