The Freeman Manufacturing Company is considering a new
investment. Financial projections for the investment are tabulated
below. The corporate tax rate is 34 percent. Assume all sales
revenue is received in cash, all operating costs and income taxes
are paid in cash, and all cash flows occur at the end of the year.
All net working capital is recovered at the end of the
project.
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | ||||||
| Investment | $ | 41,000 | ||||||||
| Sales revenue | $ | 21,000 | $ | 21,500 | $ | 22,000 | $ | 19,000 | ||
| Operating costs | 4,400 | 4,500 | 4,600 | 3,800 | ||||||
| Depreciation | 10,250 | 10,250 | 10,250 | 10,250 | ||||||
| Net working capital spending | 470 | 520 | 570 | 470 | ? | |||||
a. Compute the incremental net income of the
investment for each year. (Do not round intermediate
calculations.)
| Year 1 | Year 2 | Year 3 | Year 4 | ||
| Net income | $ | $ | $ | $ | |
b. Compute the incremental cash flows of the
investment for each year. (Do not round intermediate
calculations. A negative answer
should be indicated by a minus sign.)
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |
| Cash flow | $ | $ | $ | $ | $ |
c. Suppose the appropriate discount rate is 13
percent. What is the NPV of the project? (Do not round
intermediate calculations and round your answer to 2 decimal
places, e.g., 32.16.)
NPV $
In: Finance
Problem 8-2 Calculating Project NPV
The Freeman Manufacturing Company is considering a new
investment. Financial projections for the investment are tabulated
below. The corporate tax rate is 35 percent. Assume all sales
revenue is received in cash, all operating costs and income taxes
are paid in cash, and all cash flows occur at the end of the year.
All net working capital is recovered at the end of the
project.
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | ||||||
| Investment | $ | 32,000 | ||||||||
| Sales revenue | $ | 16,500 | $ | 17,000 | $ | 17,500 | $ | 14,500 | ||
| Operating costs | 3,500 | 3,600 | 3,700 | 2,900 | ||||||
| Depreciation | 8,000 | 8,000 | 8,000 | 8,000 | ||||||
| Net working capital spending | 380 | 430 | 480 | 380 | ? | |||||
a. Compute the incremental net income of the
investment for each year. (Do not round intermediate
calculations.)
| Year 1 | Year 2 | Year 3 | Year 4 | ||
| Net income | $ | $ | $ | $ | |
b. Compute the incremental cash flows of the
investment for each year. (Do not round intermediate
calculations. A negative answer
should be indicated by a minus sign.)
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |
| Cash flow | $ | $ | $ | $ | $ |
c. Suppose the appropriate discount rate is 12
percent. What is the NPV of the project? (Do not round
intermediate calculations and round your answer to 2 decimal
places, e.g., 32.16.)
NPV $
In: Finance
Banko Inc. manufactures sporting goods. The following
information applies to a machine purchased on January 1, Year
1:
| Purchase price | $ | 91,000 | |
| Delivery cost | $ | 5,000 | |
| Installation charge | $ | 3,000 | |
| Estimated life | 5 | years | |
| Estimated units | 160,000 | ||
| Salvage estimate | $ | 3,000 | |
During Year 1, the machine produced 56,000 units, and during Year 2
it produced 58,000 units.
Required
a. Determine the amount of depreciation expense
for Year 1 and Year 2 using straight-line method.
b. Determine the amount of depreciation expense
for Year 1 and Year 2 using double-declining-balance method.
c. Determine the amount of depreciation expense
for Year 1 and Year 2 using units of production method.
d. Determine the amount of depreciation expense
for Year 1 and Year 2 using MACRS, assuming that the machine is
classified as seven-year property. (Round your answers to
the nearest dollar amount.)
MACRS table:
| Year | 5-Year property,% |
7-Year property,% |
||||
| 1 | 20.00 | 14.29 | ||||
| 2 | 32.00 | 24.49 | ||||
| 3 | 19.20 | 17.49 | ||||
| 4 | 11.52 | 12.49 | ||||
| 5 | 11.52 | 8.93 | ||||
| 6 | 5.76 | 8.92 | ||||
| 7 | 8.93 | |||||
| 8 | 4.46 | |||||
|
In: Accounting
The Freeman Manufacturing Company is considering a new
investment. Financial projections for the investment are tabulated
below. The corporate tax rate is 40 percent. Assume all sales
revenue is received in cash, all operating costs and income taxes
are paid in cash, and all cash flows occur at the end of the year.
All net working capital is recovered at the end of the
project.
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | ||||||
| Investment | $ | 26,000 | ||||||||
| Sales revenue | $ | 13,500 | $ | 14,000 | $ | 14,500 | $ | 11,500 | ||
| Operating costs | 2,900 | 3,000 | 3,100 | 2,300 | ||||||
| Depreciation | 6,500 | 6,500 | 6,500 | 6,500 | ||||||
| Net working capital spending | 320 | 370 | 420 | 320 | ? | |||||
a. Compute the incremental net income of the
investment for each year. (Do not round intermediate
calculations.)
| Year 1 | Year 2 | Year 3 | Year 4 | ||
| Net income | $ | $ | $ | $ | |
b. Compute the incremental cash flows of the
investment for each year. (Do not round intermediate
calculations. A negative answer
should be indicated by a minus sign.)
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |
| Cash flow | $ | $ | $ | $ | $ |
c. Suppose the appropriate discount rate is 11
percent. What is the NPV of the project? (Do not round
intermediate calculations and round your answer to 2 decimal
places, e.g., 32.16.)
NPV $
In: Accounting
|
The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 40 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. |
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | ||||||
| Investment | $ | 37,000 | ||||||||
| Sales revenue | $ | 19,000 | $ | 19,500 | $ | 20,000 | $ | 17,000 | ||
| Operating costs | 4,000 | 4,100 | 4,200 | 3,400 | ||||||
| Depreciation | 9,250 | 9,250 | 9,250 | 9,250 | ||||||
| Net working capital spending | 430 | 480 | 530 | 430 | ? | |||||
| a. |
Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.) |
| Year 1 | Year 2 | Year 3 | Year 4 | ||
| Net income | $ | $ | $ | $ | |
| b. |
Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.) |
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |
| Cash flow | $ | $ | $ | $ | $ |
| c. |
Suppose the appropriate discount rate is 12 percent. What is the NPV of the project? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) |
| NPV | $ |
In: Finance
|
The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 35 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. |
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | ||||||
| Investment | $ | 44,000 | ||||||||
| Sales revenue | $ | 22,500 | $ | 23,000 | $ | 23,500 | $ | 20,500 | ||
| Operating costs | 4,700 | 4,800 | 4,900 | 4,100 | ||||||
| Depreciation | 11,000 | 11,000 | 11,000 | 11,000 | ||||||
| Net working capital spending | 500 | 550 | 600 | 500 | ? | |||||
| a. |
Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.) |
| Year 1 | Year 2 | Year 3 | Year 4 | ||
| Net income | $ | $ | $ | $ | |
| b. |
Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.) |
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |
| Cash flow | $ | $ | $ | $ | $ |
| c. |
Suppose the appropriate discount rate is 13 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| NPV | $ |
In: Finance
a. The nominal interest rate on a one-year bond originating date 1 and maturing date 2. (The one-year rate next year.)
b. The real interest rate on a one-year bond originating date 1 and maturing date 2. (The one-year real rate next year.)
c. The real interest rate on a one-year bond originating date 2 and maturing date 3. (The one-year real rate two years from now.)
3. Suppose the situation is as described in question 2. However, you are firmly convinced that next year’s one-year nominal interest rate will be 12% rather than the answer you found to 2.a. a. Describe the steps you would take today to put yourself in a position to profit if your belief is correct.
b. If next year it turns out you are right and the one-year interest rate is indeed 12%, describe the steps you would take at that time and demonstrate that a profit results.
In: Finance
|
The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 34 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. |
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | ||||||
| Investment | $ | 28,000 | ||||||||
| Sales revenue | $ | 14,500 | $ | 15,000 | $ | 15,500 | $ | 12,500 | ||
| Operating costs | 3,100 | 3,200 | 3,300 | 2,500 | ||||||
| Depreciation | 7,000 | 7,000 | 7,000 | 7,000 | ||||||
| Net working capital spending | 340 | 390 | 440 | 340 | ? | |||||
| a. |
Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.) |
| Year 1 | Year 2 | Year 3 | Year 4 | ||
| Net income | $ | $ | $ | $ | |
| b. |
Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.) |
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |
| Cash flow | $ | $ | $ | $ | $ |
| c. |
Suppose the appropriate discount rate is 12 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| NPV | $ |
In: Finance
Comparing Three Depreciation Methods
Waylander Coatings Company purchased waterproofing equipment on January 6 for $637,400. The equipment was expected to have a useful life of four years, or 6,800 operating hours, and a residual value of $52,600. The equipment was used for 2,600 hours during Year 1, 2,100 hours in Year 2, 1,200 hours in Year 3, and 900 hours in Year 4.
Required:
1. Determine the amount of depreciation expense
for the years ended December 31, Year 1, Year 2, Year 3, and Year
4, by (a) the straight-line method, (b) the units-of-output method,
and (c) the double-declining-balance method. Also determine the
total depreciation expense for the four years by each method.
Note: FOR DECLINING BALANCE ONLY, round the multiplier to four
decimal places. Then round the answer for each year to the nearest
whole dollar.
| Depreciation Expense | ||||||
| Year | Straight-Line Method | Units-of-Output Method | Double-Declining-Balance Method | |||
| Year 1 | $ | $ | $ | |||
| Year 2 | $ | $ | $ | |||
| Year 3 | $ | $ | $ | |||
| Year 4 | $ | $ | $ | |||
| Total | $ | $ | $ | |||
In: Accounting
Comparing Three Depreciation Methods
Waylander Coatings Company purchased waterproofing equipment on January 6 for $359,800. The equipment was expected to have a useful life of four years, or 10,000 operating hours, and a residual value of $29,800. The equipment was used for 3,800 hours during Year 1, 3,100 hours in Year 2, 1,800 hours in Year 3, and 1,300 hours in Year 4.
Required:
1. Determine the amount of depreciation expense
for the years ended December 31, Year 1, Year 2, Year 3, and Year
4, by (a) the straight-line method, (b) the units-of-output method,
and (c) the double-declining-balance method. Also determine the
total depreciation expense for the four years by each method.
Note: FOR DECLINING BALANCE ONLY, round the multiplier to four
decimal places. Then round the answer for each year to the nearest
whole dollar.
| Depreciation Expense | ||||||
| Year | Straight-Line Method | Units-of-Output Method | Double-Declining-Balance Method | |||
| Year 1 | $ | $ | $ | |||
| Year 2 | $ | $ | $ | |||
| Year 3 | $ | $ | $ | |||
| Year 4 | $ | $ | $ | |||
| Total | $ | $ | $ |
|||
In: Accounting