Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.38 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life. The project is estimated to generate $1,805,000 in annual sales, with costs of $715,000. The project requires an initial investment in net working capital of $440,000, and the fixed asset will have a market value of $465,000 at the end of the project.

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.64 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,060,000 in annual sales, with costs of $755,000. The project requires an initial investment in net working capital of $280,000, and the fixed asset will have a market value of $270,000 at the end of the project. If the tax rate is 35 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.) Cash Flow Year 0 $ Year 1 $ Year 2 $ Year 3 $ If the required return is 13 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $

Comparing three depreciation methods

Dexter Industries purchased packaging equipment on January 8 for $72,000. The equipment was expected to have a useful life of three years, or 18,000 operating hours, and a residual value of $4,500. The equipment was used for 7,600 hours during Year 1, 6,000 hours in Year 2, and 4,400 hours in Year 3.

Required:

1. Determine the amount of depreciation expense for the three years ending December 31, by (a) the straight-line method, (b) the units-of-activity method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the three years by each method. Round the final answers for each year to the nearest whole dollar.

2. What method yields the highest depreciation expense for Year 1?

3. What method yields the most depreciation over the three-year life of the equipment?

Down Under Boomerang, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.31 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life. The project is estimated to generate $1,785,000 in annual sales, with costs of $695,000. The project requires an initial investment in net working capital of $400,000, and the fixed asset will have a market value of $405,000 at the end of the project

. a. If the tax rate is 25 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.)

b. If the required return is 11 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

2. he Beijing Hat Company (BHC) has a project to produce white summer hats with an English rose motif. The initial investment is £37 million and the project will last 10 years. The revenue in each year from year 1 to year 10 will be £26 million but the costs, which will be £10 million in year 1, will then grow by 17% each year over the life of the project. (This means that the costs in year 2, for example, will be 17% higher than the costs in year 1, the costs in year 3 will be 17% higher than the costs in year 2, etc.). BHC does not pay tax and the cost of capital for the project is 5% per year.

   1. Compute the free cash flows (FCFs) on the project.

   2. (5marks)BHC usually employs the internal rate of return(IRR)to assess projects. Under what circumstances is IRR a reliable rule for judging whether a project should be accepted?

   3. What are the problems in using IRR to decide whether BHC’s summer hat project should go ahead?

   4. Should BHC go ahead with the project?

1. A statistics professor classifies his students according to their grade point average (GPA) and their class rank. GPA is on a 0.0 – 4.0 scale, and class rank is defined as the lower class (year 1 and year 2) and the upper class (year 3 and year 4). One student is selected at random.

a. Given that the student selected is in the upper class (year 3 and 4), what is the probability that her GPA over 3.0?

b. What is the probability that the student is in the upper class (year 3 and 4) or having a GPA over 3.0?

c. Are being in the upper class (year 3 and 4) and having a GPA over 3.0 independent? Prove statistically.

d. Are being in the upper class (year 3 and 4) and having a GPA over 3.0 mutually exclusive? Prove statistically.

Exercise 1-2 Accrual accounting [LO1-2]

Listed below are several transactions that took place during the second and third years of operations for RPG Company.

In addition, you learn that the company incurred advertising costs of $35,000 in year 2, owed the advertising agency $6,000 at the end of year 1, and there were no liabilities at the end of year 3. Also, there were no anticipated bad debts on receivables, and the rent payment was for a two-year period, year 2 and year 3.

Required:
1. Calculate accrual net income for both years.
2. Determine the amount due the advertising agency that would be shown as a liability on RPG’s balance sheet at the end of year 2.

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.61 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,050,000 in annual sales, with costs of $745,000. The project requires an initial investment in net working capital of $270,000, and the fixed asset will have a market value of $275,000 at the end of the project. If the tax rate is 30 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.)
  

If the required return is 15 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
NPV           $

The White Flour company is considering expanding its operations into computer-based basketball games. The managers feel that there is a 3-year life associated with the project, and it will initially involve an investment of $100,000. It also believes that there is a 60% chance of success and a cash flow of $100,000 in year 1 and a 40% chance of failure and a $10,000 cash flow in year 1. If the project fails in year 1, there is a 60% chance that it will produce cash flows of only $10,000 in years 2 and 3. There is also a 40% chance that it will really fail and Sega will earn nothing in year 2 and get out of this line of business, with the project terminating and no cash flow occurring in year 3. If conversely, this project succeeds in the first year, then cash flows in the second year are expected to be $200,000, $175,000, or $150,000 with probabilities of 30%, 50%, and 20%, respectively. Finally, the cash flows in the third and final year of operation are expected to be either $30,000 more or $20,000 less than they were in year 2, with an equal chance of occurrence.

a. Construct a probability tree representing the possible outcomes.

b. Determine the joint probability of each possible sequence of events.