Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles​ (who wants to ride on a cloudy day​ anyway?) The proposed project has the following​ features; ​• The firm just spent​ $300,000 for a marketing study to determine consumer demand​ (@ t=0). ​• Aero Motorcycles purchased the land the factory will be built on 5 years ago for​ $2,000,000 and owns it outright​ (that is, it does not have a​ mortgage).

The land has a current market value of​ $2,737,643. ​• The project has an initial cost of​ $20,000,000 (excluding​ land, hint: the land is not subject to​ depreciation). ​• If the project is​ undertaken, at t​ = 0 the company will need to increase its inventories by​ $3,500,000, accounts receivable by​ $1,500,000, and its accounts payable by​ $2,000,000. This net operating working capital will be recovered at the end of the​ project’s life​ (t =​ 10). ​• If the project is​ undertaken, the company will realize an additional​ $8,000,000 in sales over each of the next ten years.​ (i.e. sales in each year are​ $8,000,000) ​• The company’s operating cost​ (not including​ depreciation) will equal​ 50% of sales. ​•

The company’s tax rate is 35 percent. ​• Use a​ 10-year straight-line depreciation schedule. ​• At t​ = 10, the project is expected to cease being economically viable and the factory​ (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase​ price). ​• The project’s WACC​ = 10 percent ​• Assume the firm is profitable and able to use any tax credits​ (i.e. negative​ taxes). What is the​ project's NPV? Round to nearest whole dollar value

Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles​ (who wants to ride on a cloudy day​ anyway?) The proposed project has the following​ features; ​• The firm just spent​ $300,000 for a marketing study to determine consumer demand​ (@ t=0). ​• Aero Motorcycles purchased the land the factory will be built on 5 years ago for​ $2,000,000 and owns it outright​ (that is, it does not have a​ mortgage).

The land has a current market value of​ $2,913,027. ​• The project has an initial cost of​ $20,000,000 (excluding​ land, hint: the land is not subject to​ depreciation). ​• If the project is​ undertaken, at t​ = 0 the company will need to increase its inventories by​ $3,500,000, accounts receivable by​ $1,500,000, and its accounts payable by​ $2,000,000. This net operating working capital will be recovered at the end of the​ project’s life​ (t =​ 10). ​• If the project is​ undertaken, the company will realize an additional​ $8,000,000 in sales over each of the next ten years.​ (i.e. sales in each year are​ $8,000,000) ​• The company’s operating cost​ (not including​ depreciation) will equal​ 50% of sales. ​•

The company’s tax rate is 35 percent. ​• Use a​ 10-year straight-line depreciation schedule. ​• At t​ = 10, the project is expected to cease being economically viable and the factory​ (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase​ price). ​• The project’s WACC​ = 10 percent ​• Assume the firm is profitable and able to use any tax credits​ (i.e. negative​ taxes). What is the​ project's NPV? Round to nearest whole dollar value.

Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles​ (who wants to ride on a cloudy day​ anyway?) The proposed project has the following​ features;

​• The firm just spent​ $300,000 for a marketing study to determine consumer demand​ (@ t=0).

​• Aero Motorcycles purchased the land the factory will be built on 5 years ago for​ $2,000,000 and owns it outright​ (that is, it does not have a​ mortgage). The land has a current market value of​ $2,517,803.

​• The project has an initial cost of​ $20,000,000 (excluding​ land, hint: the land is not subject to​ depreciation).

​• If the project is​ undertaken, at t​ = 0 the company will need to increase its inventories by​ $3,500,000, accounts receivable by​ $1,500,000, and its accounts payable by​ $2,000,000. This net operating working capital will be recovered at the end of the​ project’s life​ (t =​ 10).

​• If the project is​ undertaken, the company will realize an additional​ $8,000,000 in sales over each of the next ten years.​ (i.e. sales in each year are​ $8,000,000)

​• The company’s operating cost​ (not including​ depreciation) will equal​ 50% of sales.

​• The company’s tax rate is 35 percent.

​• Use a​ 10-year straight-line depreciation schedule.

​• At t​ = 10, the project is expected to cease being economically viable and the factory​ (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase​ price).

​• The project’s WACC​ = 10 percent

​• Assume the firm is profitable and able to use any tax credits​ (i.e. negative​ taxes).

What is the​ project's NPV? Round to nearest whole dollar value.

5. The Gardner Theater, a community playhouse, needs to determine the lowest-cost production budget for an upcoming show. Specifically, they have to determine which set pieces to construct and which, if any, set pieces to rent from another local theater at a predetermined fee. However, the organization has only two weeks to fully construct the set before the play goes into technical rehearsals. The theater has two part-time carpenters who work up to 12 hours a week, each at $10 an hour. Additionally, the theater has a part-time scenic artist who can work 15 hours per week to paint the set and props as needed at a rate of $15 per hour. The set design requires 20 flats (walls), two hanging drops with painted scenery, and three large wooden tables (props). The number of hours required for each piece for carpentry and painting is shown below:

Flats, hanging drops, and props can also be rented at a cost of $75, $500, and $350 each, respectively. How many of each unit should be built by the theater and how many should be rented to minimize total costs?

Details of McCormick Plant Proposal McCormick & Company is considering a project that requires an initial investment of $24 million to build a new plant and purchase equipment. The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The new plant will be built on some of the company's land, which has a current, after-tax market value of $4.3 million.

The company will produce bulk units at a cost of $130 each and will sell them for $420 each. There are annual fixed costs of $500,000. Unit sales are expected to be $150,000 each year for the next six years, at which time the project will be abandoned. At that time, the plant and equipment is expected to be worth $8 million (before tax) and the land is expected to be worth $5.4 million (after tax).

To supplement the production process, the company will need to purchase $1 million worth of inventory. That inventory will be depleted during the final year of the project. The company has $100 million of debt outstanding with a yield to maturity of 8 percent, and has $150 million of equity outstanding with a beta of 0.9. The expected market return is 13 percent, and the risk-free rate is 5 percent. The company's marginal tax rate is 40 percent.

What will be the tax depreciation each year?

PLEASE show how you calculated the value of the plant and equipment purposes in six years.

What will be the value of the plant and equipment for tax purposes in year six? Will it be sold for a gain or a loss, and what will the tax effect be?

A city is deciding whether it makes sense to invest in a light rail line. Engineers have projected that if the rail line were to be built, once completed it would reduce travel time for 2,000 commuters by 60 minutes per day (for each workday). The line will take four years to build. The costs of construction are projected to equal $25,000,000 per year, and the costs of operating the line are assumed to equal $2,000,000 per year. Assume that the project is to be evaluated over a 20 year time horizon, and Evermore uses its borrowing rate of 3% as the discount rate.

1. Assume that time is valued at $20 per hour per commuter. There are 5 workdays per week in a 52 week year. Calculate the monetary value of the reduced commute time projected to result from construction of the light rail line.
2. Using the spreadsheet template that is provided, calculate:
   1. the net present value of the project;
   2. The benefit-cost ratio.

1. Now suppose that Evermore seeks federal funding for the project, and is told that in evaluating the project it needs to use the discount rate recommended by OMB for infrastructure projects. How would this change your results?

1. Sunk costs- Costs that have accrued in the past. Example: An organization has a project with an initial budget of $2,000,0000. The project is half complete and has spent $3,000,000. Should the organization consider the fact that it is already $1,000,000 over budget when determining whether to continue with the project?

2. A five-year project has an initial fixed asset investment of $600,600, an initial net working capital investment of $21,000, and an annual operating cash flow of –$75,400. The fixed asset is fully depreciated over the life of the project and has no salvage value. The net working capital will be recovered when the project ends. The required return is 11 percent. What is the project's equivalent annual cost, or EAC?

A

−$248,092.76

B

−$182,309.18

C

−$246,586.50

D

−$321,929.36

E

−$240,214.53

3.Ethics Issues

In an L.A. Law episode, an automobile manufacturer knowingly built cars that had a significant safety flaw.

Rather than redesigning the cars (at substantial additional cost), the manufacturer calculated the expected costs of future lawsuits and determined that it would be cheaper to sell an unsafe car and defend itself against lawsuits than to redesign the car.

What issues does the financial analysis overlook?

4.Fill in the Blanks

A $1,000,000 investment is depreciated using a seven-year MACRS class life.

It requires $150,000 in additional inventory and will increase accounts payable by $50,000.

It will generate $400,000 in revenue and $150,000 in cash expenses annually, and the tax rate is 40%.

What is the incremental cash flow in years 0,

Year 1

Year 7

Year 8?

The following table reports the operating cycle, cash conversion cycle, and current ratio for three apparel retailers all having year-ends at January 31, 2015. Aeropostale, which was originally owned by Macy’s, is a specialty retailer of casual apparel and accessories targeting 14- to 17-year olds. The GAP built its brand name on basic, casual clothing and expanded its market by opening Banana Republic and Old Navy Stores. Ross Stores operates Ross Dress for Less^® stores, which primarily target middle-income households.

All three companies follow the industry practice of including occupancy costs in cost of goods sold.

Required:

Do any of these companies appear to have a short-term liquidity problem?

How does the industry practice of including occupancy costs in cost of goods sold affect the statistics presented in the above table?

What is the most likely explanation for Ross Stores’ 2.2 days accounts receivable outstanding?

What is the most likely explanation for 0.0 days accounts receivable outstanding at Aeropostale and The GAP?

McCormick & Company is considering a project that requires an initial investment of $24millionto build a new plant and purchase equipment. The investment will be depreciated as a modified acceleratedcost recovery system(MACRS) seven-year class asset. The new plant will be built on some of the company's land, which has a current, after-tax market value of $4.3million.The company will produce bulk units at a cost of $130 each and will sell them for $420 each. There are annual fixed costs of $500,000. Unit sales are expected to be $150,000each year for the next sixyears, at which time the project will be abandoned. At that time, the plant and equipment is expected to be worth $8million(before tax) and the land is expected to be worth $5.4million(after tax).  To supplement the production process, the company will need to purchase $1millionworth of inventory. That inventory will be depleted during the final year of the project. The company has $100millionof debt outstanding with a yieldtomaturity of 8percent, and has $150millionof equity outstanding with a beta of 0.9. The expected market return is 13percent,and the risk-free rate is 5percent.The company's marginal tax rate is 40percent.

6. Create an after-tax cash flow timeline.

7.What are the total expected cash flows at the end of year six?The $4.3millionis an opportunity cost and must be included at date zero as a cash outflow.If the project is accepted, however, the land can be sold in six years for $5.4million.

8.Find the NPV using the after-tax WACC as the discount rate.

9.Find the IRR.

10.Should the project be accepted? Discuss whether NPV or IRR creates the best decision rule.  

5. CarPoint is a comprehensive consumer-oriented automotive web site offering users

complete car-buying and care information on all makes and models. It provides fast, convenient

access to detailed specifications and pricing information on both new and used

cars. It also provides reviews and advice from leading automotive writers, and personalized

maintenance and recall information. Ford Motor Company was CarPoint’s first

partner. Ford’s concept is to allow consumers to order any model car to their exact specifications

and receive immediate feedback on availability. Consumers are able to schedule

delivery and service at their local dealership, making it easier for consumers to buy cars

over the Internet.

Once a consumer decides what car she wants to buy, CarPoint locates an existing car,

regardless of where in the country it is, or they place an order for a new custom car to be

built at the factory and delivered to the consumer’s local dealership. During the process,

both the manufacturer and the dealer will get instant, online status reports on the order

from the time the order is placed until it is delivered to the customer.

Ford sees its advantage in better managing its order-fulfillment process. It streamlines

production and allows better inventory management through its supply chain.

b. List the steps in the Internet value chain, and discuss the time, quality, and cost of the

experience to the consumer.

c. What cost, quality, and time benefits will Ford likely encounter with their new

arrangement with CarPoint? What causes these benefits?

d. How will a service like CarPoint likely affect dealers’ behavior toward their customers?