Ross Corporation is thinking of opening a new warehouse. The new equipment required has a net cost (depreciable basis) of €125,000. In addition, the company owns the building that would be used, and it could sell it for €130,000 after taxes if it decides not to open the new warehouse. The equipment for the project would be depreciated by the straight-line method over the project's 4-year life, after which it would be worth nothing and thus it would have a zero-salvage value. No new working capital would be required, and sales revenues (€160,000) and other operating costs (€50,000) would be constant over the project's 4-year life. The project’s cost of capital is 12%, and the tax rate is 35%. Based on Ross Corporation data, answer the questions

What is the annual cash flow of the project for years 1 to 4?

What is the project’s NPV (no decimal, no rounding)?

What is the project’s pay-back period (two decimals, no rounding)?

Brett started a new construction business in April 2017. In connection with the new business, he purchased a new backhoe for $60,000 in June 2017 and immediately placed it in service. The new business is struggling and expecting to show a loss for 2017. Brett is considering expensing the $60,000 cost of the backhoe under §179 on the 2017 tax return. Brett has been awarded a large project for 2018, and will show a substantial profit (over $100,000) for the year ending 12/31/2018. Your response must fully address the following: Evaluate the appropriateness of Brett’s plan. Explain your position. How could changes in tax law affect the appropriateness of Brett's plan?

Suppose Lifetime Insurance Company is offering a new policy to the parents of new born babies. The parent will pay $1,000 per year starting on the babies first birthday and will continue until her fifth birthday. After that, no more payments will be made. When the child reaches age 65, he or she receives $500,000. If the relevant interest rate is 10 percent for the first five years and 8 percent for all subsequent years, is the policy worth buying?

New Economy Transport (A)

The New Economy Transport Company (NETCO) was formed in 1959 to carry cargo and passengers

between ports in the Pacific Northwest and Alaska. By 2012 its fleet had grown to four

vessels, including a small dry-cargo vessel, the Vital Spark.

The Vital Spark is 25 years old and badly in need of an overhaul. Peter Handy, the finance

director, has just been presented with a proposal that would require the following expenditures:

Mr. Handy believes that all these outlays could be depreciated for tax purposes in the seven-year

MACRS class.

NETCO’s chief engineer, McPhail, estimates the postoverhaul operating costs as follows:

These costs generally increase with inflation, which is forecasted at 2.5% a year.

The Vital Spark is carried on NETCO’s books at a net depreciated value of only $100,000, but

could probably be sold “as is,” along with an extensive inventory of spare parts, for $200,000.

The book value of the spare parts inventory is $40,000. Sale of the Vital Spark would generate an

immediate tax liability on the difference between sale price and book value.

The chief engineer also suggests installation of a brand-new engine and control system, which

would cost an extra $600,000. (This additional outlay would also qualify for tax depreciation in the 7 year MACRS class). This additional equipment would not substantially improve the

Vital Spark ’s performance, but would result in the following reduced annual fuel, labor, and

maintenance costs:

Overhaul of the Vital Spark would take it out of service for several months. The overhauled

vessel would resume commercial service next year. Based on past experience, Mr. Handy

believes that it would generate revenues of about $1.4 million next year, increasing with inflation

thereafter.

But the Vital Spark cannot continue forever. Even if overhauled, its useful life is probably no

more than 10 years, 12 years at the most. Its salvage value when finally taken out of service will

be trivial.

NETCO is a conservatively financed firm in a mature business. It normally evaluates capital

investments using an 11% cost of capital. This is a nominal, not a real, rate. NETCO’s tax rate is 35%.

QUESTION

1. Calculate the NPV of the proposed overhaul of the Vital Spark, with and without the new

engine and control system. To do the calculation, you will have to prepare a spreadsheet table

showing all costs after taxes over the vessel’s remaining economic life. Take special care with

your assumptions about depreciation tax shields and inflation.

Average Rate of Return—New Product Galactic Inc. is considering an investment in new equipment that will be used to manufacture a smartphone. The phone is expected to generate additional annual sales of 6,500 units at $269 per unit. The equipment has a cost of $604,500, residual value of $45,500, and an eight-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows: Cost per unit: Direct labor $45.00 Direct materials 175.00 Factory overhead (including depreciation) 30.50 Total cost per unit $250.50 Determine the average rate of return on the equipment. If required, round to the nearest whole percent. %

OASIS Cables Company is considering a new project of introducing a new type of “Twisted Shield Cables” to the market. In order to produce the cable, a machine must be purchased for O.R 2.5 million with 5 years of economic life. The marketing department of the company has already run a research on the potential customers to identify the prospect of this product. An independent consultant was also hired to identify the prospective sales. Total cost of running research and hiring consultant was O.R 500,000. According to their combined projections, in the first year the company will be able to sell 40,000 meters of the shield cable at a price of O.R 40 per meter. The selling price per meter is expected to remain the same during the 5-year life of the project. The production and sales of the product in years 2, 3, 4, and 5 will be 45,000; 48,000; 40,000; and 30,000 meters respectively. The machine will be fully depreciated over 5 years using straight-line method. Cost of goods sold per unit is expected to be O.R 15. After 5 years the machine can be sold for O.R 300,000. To raise the required capital for taking this project, the company will use 40% debt (primarily bonds) and 60% common stock equity, which is also the optimum capital structure for the firm. The debt financing will be done through bonds. A similar kind of bond of the firm is currently selling in the market for O.R 950 with 6% coupon rate and O.R 1,000 face value. The maturity is in 10 years. The common stock of the firm is currently selling in the market for O.R 2.00 and has recently declared and paid dividend of O.R 0.100 per share. The dividend is expected to grow at an annual rate of 3% per year. The company is in 25% tax bracket.

Instructions: Solve manually

* What is the gross profit margin per meter of the shield cable? * Calculate the cash payback period of this investment.

*Determine the Weighted Average Cost of Capital (WACC).

*Assuming WACC is the discount rate, calculate the profitability index of the project and decide whether Oman Cables should accept the project.

*If OASIS Cables is willing to reduce its WACC by 1%, estimate the proportionate debt to equity financing.

ABC company are considering to makes a new product, which is a new paper bottle. Now, we have following standards: 427 million bottles produced and $5.52 per 1,000 ozs of paper. They expected to cost $181144 in paper. Hoever, they realize that the company actually produced 505 million cans and used 36 million ozs of paper at the end of the year, and Paper cost the firm $247901.

1. Find Actual Usage of input per unit of output (Ua=? oz / unit. )

2. Find Actual Price per unit of input (P_a = ? $/oz.)

3. Find Budgeted Usage of input per unit of output (U_b = ? oz / unit)

4.Paper price variance

5.Is the above variance favorable or unfavorable?

6.Paper efficiency variance

7.Is the above variance favorable or unfavorable?

Assume that a new professional coffee maker sales representative claims that the new coffee maker will increase coffee made by at least 30 cups per hour. A coffee shop chain manager buys the new machine for his 15 coffee shop branches in Dubai and finds that the average increase was 32 cups. Assume that the standard deviation is 7 cups for this coffee maker.

1. State the null and alternative hypotheses.

2. Test the hypotheses at the 5% significance level. What is the p-value of the test?

3. What is your conclusion in the context of the question?

4. Interpret the p-value you found above.

5. What type of error you can commit here? Explain in the context of the question. Also, what are the

   implications of this error?

(New project analysis​) Garcia's Truckin' Inc. is considering the purchase of a new production machine for $200,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $50,000 per year. To operate the machine​ properly, workers would have to go through a brief training session that would cost $5,000 after taxes. It would cost $5,000 to install the machine properly.​ Also, because this machine is extremely​ efficient, its purchase would necessitate an increase in inventory of $20,000. This machine has an expected life of 10 years, after which it will have no salvage value.​ Finally, to purchase the new​ machine, it appears that the firm would have to borrow​ $100,000 at 8 percent interest from its local​ bank, resulting in additional interest payments of $8,000 per year. Assume simplified​ straight-line depreciation and that the machine is being depreciated down to​ zero, a 34 percent marginal tax​ rate, and a required rate of return of 10 percent.

a. What is the initial outlay associated with this​ project?

b. What are the annual​ after-tax cash flows associated with this project for years 1 through​ 9?

c. What is the terminal cash flow in year 10 (what is the annual​ after-tax cash flow in year 10 plus any additional cash flows associated with the termination of the​ project)?

d. Should the machine be​ purchased?