Question

1. ABC Inc. has a choice between two mutually exclusive projects, Project I has cash flows of −$48,000, $20,200, $20,500, and $19,000 for Years 0 to 3, respectively. Project II has a cost of $45,000 and annual cash inflows of $18,500 for 3 years. At what rate would you be indifferent between these two projects? Which project will you take if the required return is 10%. (1+1 points)

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2. ABC Inc. needs 150,000 boxes of parts per year over the next four years, and you are deciding on a bid for the contract. The capital equipment will cost $950,000 to install, which will be depreciated straight-line to zero over the life of the project. The equipment can be sold for $250,000 in four years. The equipment will be installed on land the company already owns. The land can be sold for $750,000 after-tax today. The land is expected to net $850,000 after taxes in 4 years. The fixed production costs are $225,000 per year, and the variable costs are $10.0 for each box. An initial investment in net working capital of $65,000 will be required. An additional $5,000 in networking capital will be required in years 1, 2, and 3. All of the networking capital investment will be recovered at the end of the project. The tax rate is 21 percent and you require a return of 15 percent. What bid price per box should you submit? (3 points)

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3. ABC Inc. has a choice between two machines A and B. The company requires a return of 15% percent and uses straight-line depreciation to a zero book value over a machine's life. Machine A has a cost of $300,000, annual operating costs of $9,000, and a life of 3 years. Machine B costs $225,000, has annual operating costs of $12,000, and a life of 2 years. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should ABC purchase and why? Assume a tax rate of 21%. (3 points)

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4. With a purchase of new equipment for $400,000, ABC Inc. can lower its annual operating costs by $150,000. The equipment will be depreciated straight-line to a zero book value over the project’s life of 3 years. At the end of the three years, the equipment will be sold for $30,000. The new equipment will require additional spare parts inventory of $15,000 over the 3 year period. What is the NPV if the discount rate is 15 percent and the tax rate is 21 percent? (2 points)

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5. You are comparing LED and CFL bulbs. A 100 watt CFL bulb costs $1.00 and lasts 1,500 hours, while a comparable LED bulb of 15 watts costs $3.00 and lasts 4,000 hours. There are 1,000 watt in a kilowatt and a unit of electricity (1,000 watts-hour) costs 12 cents. If you use each bulb for 500 hours in a year and require a return of 15% what are the equivalent annual cost of each bulb? (2 points)

Answer 1