Question

Question 2:

A. Fairfax Pizza is considering buying a new oven. The new oven would be purchased today for 21,000 dollars. It would be depreciated straight-line to 1,400 dollars over 2 years. In 2 years, the oven would be sold for an after-tax cash flow of 2,500 dollars. Without the new oven, costs are expected to be 14,700 dollars in 1 year and 17,400 in 2 years. With the new oven, costs are expected to be 1,800 dollars in 1 year and 12,000 in 2 years. If the tax rate is 50 percent and the cost of capital is 5.05 percent, what is the net present value of the new oven project?

B. Oxygen Optimization is considering buying a new purification system. The new system would be purchased today for 20,400 dollars. It would be depreciated straight-line to 1,200 dollars over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be 1,800 dollars. The system is expected to reduce costs by 7,400 dollars in year 1 and by 15,200 dollars in year 2. If the tax rate is 50 percent and the cost of capital is 10.55 percent, what is the net present value of the new purification system project?

C. What is the NPV of project A? The project would require an initial investment in equipment of 36,000 dollars and would last for either 3 years or 4 years (the date when the project ends will not be known until it happens and that will be when the equipment stops working in either 3 years from today or 4 years from today). Annual operating cash flows of 12,960 dollars per year are expected each year until the project ends in either 3 years or 4 years. In 1 year, the project is expected to have an after-tax terminal value of 27,269 dollars. The cost of capital for this project is 7.42 percent.

D.

Litchfield Design is evaluating a 3-year project that would involve buying a new piece of equipment for 410,000 dollars today. The equipment would be depreciated straight-line to 40,000 dollars over 2 years. In 3 years, the equipment would be sold for an after-tax cash flow of 50,000 dollars. In each of the 3 years of the project, relevant revenues are expected to be 296,000 dollars and relevant costs are expected to be 127,000 dollars. The tax rate is 50 percent and the cost of capital for the project is 5.76 percent. What is the NPV of the project?

Answer 1

the qurstion is related to npv method of project evaluation.